Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/29950
Authors: 
Hörmann, Markus
Schabert, Andreas
Year of Publication: 
2009
Series/Report no.: 
Ruhr economic papers 115
Abstract: 
Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard New Keynesian model, we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing: The minimum state variable solution and an autoregessive solution under a peg can lead to lower welfare losses than the unique solution under an active interest rate rule. Given that a peg is usually blamed to facilitate endogenous fluctuations, we further show that a peg can be implemented in a way that ensures equilibrium determinacy.
Subjects: 
Interest rate rules
welfare losses
equilibrium determinacy
fundamental solutions
JEL: 
E52
E51
E32
ISBN: 
978-3-86788-128-9
Document Type: 
Working Paper

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