Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/224478
Authors: 
Gerke, Rafael
Giesen, Sebastian
Kienzler, Daniel
Year of Publication: 
2020
Series/Report no.: 
Bundesbank Discussion Paper 50/2020
Abstract: 
We revisit the reversal puzzle: A counterintuitive contraction of inflation in response to an interest rate peg. We show that it is intimately related to the degree of agents' anticipation. If agents perfectly anticipate the peg, reversals occur depending on the duration of the peg. If they do not anticipate the peg, reversals are absent. In the case of imperfect anticipation, implemented by a Markov-switching framework, we measure the degree of anticipation by the frequency of the peg regime. Even if the frequency of the peg takes on a value twice as large as empirically observed, the reversal puzzle is absent.
Subjects: 
Interest rate peg
Reversal puzzle
Regime-switching model
JEL: 
E32
E52
ISBN: 
978-3-95729-770-9
Document Type: 
Working Paper

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