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

32 Pages Posted: 15 Feb 2006

See all articles by Carlos Végh

Carlos Végh

affiliation not provided to SSRN

Date Written: March 1990

Abstract

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.

JEL Classification: 431

Suggested Citation

Végh, Carlos, Interest Rate Targeting in a Small Open Economy: The Predetermined Exchange Rates Case (March 1990). IMF Working Paper No. 90/21, Available at SSRN: https://ssrn.com/abstract=884644

Carlos Végh

affiliation not provided to SSRN

No Address Available

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