Inflation Shocks and Interest Rate Rules

24 Pages Posted: 1 Aug 2006

See all articles by Barbara Annicchiarico

Barbara Annicchiarico

Roma Tre University - Department of Law

Alessandro Piergallini

Tor Vergata University

Date Written: July 2006

Abstract

Recent empirical evidence by Fair (2002,2005) and Giordani (2003) shows that a positive inflation shock with the nominal interest rate held constant has contractionary effects. These results cannot be reconciled with the standard 'New Synthesis' literature. This paper reconsiders the effects of inflation shocks in a simple New Keynesian framework extended to include wealth effects. It is demonstrated that, following an inflation shock, the decline of output coupled with passive interest rate rules is not puzzling.

Keywords: Interest Rate Rules, Nominal Rigidities, Overlapping Generations, Inflation Shocks

JEL Classification: E52, E58

Suggested Citation

Annicchiarico, Barbara and Piergallini, Alessandro, Inflation Shocks and Interest Rate Rules (July 2006). CEIS Working Paper No. 87, Available at SSRN: https://ssrn.com/abstract=921589 or http://dx.doi.org/10.2139/ssrn.921589

Barbara Annicchiarico (Contact Author)

Roma Tre University - Department of Law ( email )

Via Ostiense 163
Roma, RM 00154
Italy

Alessandro Piergallini

Tor Vergata University ( email )

Via Columbia 2
Rome, Rome 00133
Italy
+390672595431 (Phone)
+39062020500 (Fax)

HOME PAGE: http://www.economia.uniroma2.it/piergallini

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