Interest Rate Targeting in a Small Open Economy: The Predetermined Exchange Rates Case

An important hurdle in analyzing interest rate targeting is that standard models usually lead to price level or inflation rate indeterminacy. This paper develops a simple framework in which such problems do not arise because the bonds whose interest rate is controlled provide liquidity services. Thi...

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Bibliographic Details
Main Author: Calvo, Guillermo (Author)
Format: Electronic eBook
Language:English
Published: Washington, D.C International Monetary Fund 1990
Series:IMF Working Papers Working Paper No. 90/21
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Summary:An important hurdle in analyzing interest rate targeting is that standard models usually lead to price level or inflation rate indeterminacy. This paper develops a simple framework in which such problems do not arise because the bonds whose interest rate is controlled provide liquidity services. This framework is used to examine interest rate targeting in a small open economy under predetermined exchange rates. A permanent increase in the interest rate has no real effects. In contrast, a temporary increase in the interest rate leads to higher consumption and to a current account deficit that worsens over time
Physical Description:1 Online-Ressource (32 p)
ISBN:145192142X
9781451921427

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