Using Conventional Monetary Policy Unconventionally: Overturning Inflation and Output Gap Dynamics Using a Super-Inertial Interest Rate Rule

Guy Segal

No 2021.05, Bank of Israel Working Papers from Bank of Israel

Abstract: Using simulations on different macroeconomic models, we show that monetary policy can mitigate the drop in output after a negative demand shock and lead to a positive inflation gap and convergence to its target from above. Thus, the risk hitting the ELB is lower due to the overshooting inflation. Such dynamics are feasible under a super-inertial rule, i.e., when the degree of interest rate smoothing is above a threshold greater than one. The more backward-looking the economy is, the higher the threshold is. Hence, a superinertial policy should be in the toolbox of central banks to support demand-shock dominated crisis.

Pages: 33 pages
Date: 2021-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2021.05.pdf First version, 2021 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boi:wpaper:2021.05

Access Statistics for this paper

More papers in Bank of Israel Working Papers from Bank of Israel Contact information at EDIRC.
Bibliographic data for series maintained by Yossi Yakhin ().