Fixed interest rates over finite horizons

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 18 May 2012

Working Paper No. 454
By Andrew P Blake

We consider finite horizon conditioning paths for nominal interest rates in New Keynesian monetary policy models. This is done two ways. First, we develop a simple way to use policy interventions in the form of interest rate shocks to achieve the conditioning path and show this yields a unique solution. We then modify this method to generate an infinity of solutions making the model better behaved but effectively indeterminate. Second, we use two-part rules where a specially designed targeting rule generates fixed interest rates endogenously over the initial period before reverting to a more conventional instrument rule. We show that the two approaches are equivalent. We discuss appropriate selection criteria over the resulting equilibria.

PDFFixed interest rates over finite horizons

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