Interest rate pegs in New Keynesian models

George W. Evans, Bruce McGough

    Research output: Contribution to journalArticlepeer-review

    10 Citations (Scopus)
    2 Downloads (Pure)

    Abstract

    The conventional policy perspective is that lowering the interest rate increases output and inflation in the short run, while maintaining inflation at a higher level requires a higher interest rate in the long run. In contrast, it has been argued that a Neo‐Fisherian policy of setting an interest‐rate peg at a fixed higher level will increase the inflation rate. We show that adaptive learning argues against the Neo‐Fisherian approach. Pegging the interest rate at a higher level will induce instability and most likely lead to falling inflation and output over time. Eventually, this would precipitate a change of policy.
    Original languageEnglish
    Pages (from-to)939-965
    JournalJournal of Money, Credit and Banking
    Volume50
    Issue number5
    Early online date8 Jul 2018
    DOIs
    Publication statusPublished - Aug 2018

    Keywords

    • Neo-Fisherian policy
    • Expectations
    • Learning
    • Stability

    Fingerprint

    Dive into the research topics of 'Interest rate pegs in New Keynesian models'. Together they form a unique fingerprint.

    Cite this