Fixed interest rates over finite horizons

Andrew Blake

No 454, Bank of England working papers from Bank of England

Abstract: 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.

Keywords: Fixed nominal interest rates; uniqueness; indeterminacy (search for similar items in EconPapers)
JEL-codes: C63 E47 E61 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012-05-18
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0454

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