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Inflationary Permanent and Long-Term Positive Interest Rate Shocks

Ahmadian, Mohammad Hesam | 2023

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  1. Type of Document: M.Sc. Thesis
  2. Language: English
  3. Document No: 56726 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Rahmati, Mohammad Hossein
  7. Abstract:
  8. Co-movement between inflation and nominal interest in response to an interest rate shock, dubbed neo-fisherianism, has been the subject of contentious debate since the advent of non-inflationary ZLB environment. We design an economic model rich with banking features to understand the economic responses to permanent and long-term interest rate shocks. We find that responses to a permanent positive interest rate shock depend on the monetary authorities’ speculation of the new long-term inflation rate, with the most probable outcome being a permanent increase in inflation. Responses to a long-term positive interest rate shock depict an increase and then decrease in inflation. We also discover that the real interest rate channel cannot explain the responses to the long-term positive interest rate shock. The only variable capable of explaining responses to both permanent and long-term shocks is the (real) loan-deposit rate spread. Increase in (real) loan-deposit rate spread decreases all economic activity and inflation, and vice versa
  9. Keywords:
  10. Inflation ; Monetary Policy ; Determinacy ; Real Interest Rate ; Interest Rate Spread ; Monetary Policy Shock

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