A case for interest rate inertia in monetary policy

Arbeitspapier

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 contemporane-ous 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2011:16

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Foreign Exchange
• Subject: Determinacy ; Foreign Exchange ; Interest Rate Inertia ; Least Squares Learning ; Mone-tary Policy ; Taylor Rule ; Geldpolitik ; Zinspolitik ; Taylor-Regel ; Lernprozess ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bask, Mikael
• Event: Veröffentlichung
• (who): Uppsala University, Department of Economics
• (where): Uppsala
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/82595
• URN: urn:nbn:se:uu:diva-160272
• Last update: 10.03.2025, 11:44 AM CET