Working Paper: CEPR ID: DP1610
Authors: Paul Soderlind
Abstract: Historical estimates of the Fisher effect and the informational content in the yield curve may not be relevant after a change in monetary policy. This paper uses a small dynamic rational expectations model with staggered price setting to study how central bank preferences (and thereby monetary policy) affect the relation between nominal interest rates, inflation expectations, and real interest rates. The benchmark parameters, including the Federal Reserve Bank?s loss function parameters, are estimated by maximum likelihood on quarterly US data. The policy experiments include stronger inflation targeting, more active monetary policy, and a change in commitment technology.
Keywords: monetary policy; fisher effect; inflation expectations; interest rates; kalman filter estimation
JEL Codes: E31; E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stronger inflation targeting (E63) | decrease in the Fisher effect (E43) |
| stronger inflation targeting (E63) | nominal interest rate reflects real interest rates (E43) |
| stronger inflation targeting (E63) | nominal interest rate reflects inflation expectations (E43) |
| more active monetary policy (E63) | increase in information content of nominal interest rates regarding inflation expectations (E43) |
| more active monetary policy (E63) | increase in information content of nominal interest rates regarding real interest rates (E43) |
| more active monetary policy (E63) | pronounced fluctuations in nominal interest rate in response to economic shocks (E43) |
| central bank objectives (E52) | sensitivity of the Fisher effect (E43) |
| central bank stabilizing inflation effectively (E52) | nominal interest rate reflects real interest rates (E43) |
| central bank stabilizing inflation effectively (E52) | diminished Fisher effect (E43) |