A CASE FOR INTEREST RATE INERTIA IN MONETARY POLICY
ABSTRACT We argue that it is not necessary for the central bank to react to the exchange rate to have a desirable outcome in the economy. Indeed, when the Taylor rule includes contemporaneous data on the variables in the rule, the central bank can disregard from the exchange rate as long as there is enough with interest rate inertia in monetary policy. The reason is that interest rate inertia and a reaction to the current nominal exchange rate change are perfect substitutes in monetary policy. Hence, we give a rationale for the central bank to focus on the interest rate change rather than the interest rate level to have a desirable outcome in the economy, which we define as a determinate rational expectation equilibrium that is stable under least squares learning. Copyright © 2012 John Wiley & Sons, Ltd.
Year of publication: |
2014
|
---|---|
Authors: | Bask, Mikael |
Published in: |
International Journal of Finance & Economics. - John Wiley & Sons, Ltd.. - Vol. 19.2014, 2, p. 140-159
|
Publisher: |
John Wiley & Sons, Ltd. |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Extrapolative expectations and macroeconomic dynamics : Evidence from an estimated DSGE model
Bask, Mikael, (2020)
-
Characterizing the Degree of Stability of Non-linear Dynamic Models
Bask, Mikael, (2002)
-
Language tone in financial news media and the cross-section of stock returns
Bask, Mikael, (2020)
- More ...