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

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  • Carlstrom, Charles T.
  • Fuerst, Timothy S.
  • Paustian, Matthias

Abstract

A familiar result in the canonical Dynamic New Keynesian (DNK) model is that policymakers constrained by the zero bound can improve outcomes by promising to keep rates low after the zero bound is not binding. We examine a general class of interest rate pegs in a variety of DNK models. Standard versions of the model produce counterintuitive reversals where the effect of the interest rate peg can switch from highly expansionary to highly contractionary for modest changes in the length of the interest rate peg. This unusual behavior does not arise in sticky information models of the Phillips curve.

Suggested Citation

  • Carlstrom, Charles T. & Fuerst, Timothy S. & Paustian, Matthias, 2015. "Inflation and output in New Keynesian models with a transient interest rate peg," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 230-243.
    • Handle: RePEc:eee:moneco:v:76:y:2015:i:c:p:230-243
    DOI: 10.1016/j.jmoneco.2015.09.004
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    More about this item

    Keywords

    Fixed interest rate; Dynamic New Keynesian model; Forward guidance puzzles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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