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Title: The perverse response of interest rates
Authors: Boinet, V
Martin, C
Issue Date: 2006
Publisher: Brunel University
Citation: Economics and Finance Discussion Papers, Brunel University, 06-20.
Abstract: We argue that an increase in aggregate demand can lead to a reduction in the interest rate. This apparently perverse optimal response of interest rates can occur when the Phillips curve is non-linear. In that case, an increase in aggregate demand tends to increase inflation and output but also to change the weight on inflation in the optimal monetary policy rule. Although the first two effects tend to increase interest rates, the latter effect can imply lower interest rates. If this effect dominates, interest rates can fall.
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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