Inflation and output in New Keynesian models with a transient interest rate peg

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 20 July 2012

Working Paper No. 459
By Charles T Carlstrom, Timothy S Fuerst and Matthias Paustian 

Recent monetary policy experience suggests a simple test for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. We pursue this simple test in three variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where an interest rate peg leads to sharp deflations.

PDF Inflation and output in New Keynesian models with a transient interest rate peg 

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