Arbeitspapier

Interest rate pegs and the reversal puzzle: On the role of anticipation

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.

ISBN
978-3-95729-770-9
Language
Englisch

Bibliographic citation
Series: Deutsche Bundesbank Discussion Paper ; No. 50/2020

Classification
Wirtschaft
Business Fluctuations; Cycles
Monetary Policy
Subject
Interest rate peg
Reversal puzzle
Regime-switching model

Event
Geistige Schöpfung
(who)
Gerke, Rafael
Giesen, Sebastian
Kienzler, Daniel
Event
Veröffentlichung
(who)
Deutsche Bundesbank
(where)
Frankfurt a. M.
(when)
2020

Handle
Last update
10.03.2025, 11:41 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Gerke, Rafael
  • Giesen, Sebastian
  • Kienzler, Daniel
  • Deutsche Bundesbank

Time of origin

  • 2020

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