Interest Rate Targeting in a Small Open Economy: The Predetermined Exchange Rates Case
IMF Working Papers, March 1, 1990
Source details
- Canonical URL
- Interest Rate Targeting in a Small Open Economy: The Predetermined Exchange Rates Case
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Bibliographic details
- Authors: Guillermo Calvo, Carlos A. Végh Gramont
- Published: March 1, 1990
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451921427.001
Summary and analytical framework
- Standard models of interest rate targeting usually lead to price level or inflation rate indeterminacy.
- The paper develops a simple framework in which indeterminacy does not arise because the bonds whose interest rate is controlled provide liquidity services.
- The framework is applied to examine interest rate targeting in a small open economy under predetermined exchange rates.
Key findings
- A permanent increase in the interest rate has no real effects.
- A temporary increase in the interest rate leads to:
- higher consumption, and
- a current account deficit that worsens over time.
Model implications and interpretation
- Liquidity services provided by the controlled-interest-rate bonds are central to eliminating price level or inflation indeterminacy present in standard models.
- The distinction between permanent and temporary interest rate changes is crucial for real macroeconomic outcomes under predetermined exchange rates.
Publication and descriptive metadata
- Authors: Guillermo Calvo; Carlos A. Végh Gramont
- Date: March 1, 1990
- Series: Working Paper No. 1990/021
- Issue: 021
- Volume: 1990
- Pages: 32
- DOI: https://doi.org/10.5089/9781451921427.001
- Stock No: WPIEA0211990
- ISBN: 9781451921427
- ISSN: 1018-5941
- Also published in Staff Papers, Vol. 37, No. 4, December 1990
- Subject: Consumption, Exchange rates, Inflation, Interest rate policy, Real interest rates
- Keywords: nominal interest rate, WP
Interest Rate Targeting in a Small Open Economy: The Predetermined Exchange Rates Case, IMF Working Papers, March 1, 1990.