Abstract
In this paper the author builds a financial market model to demonstrate that policy aimed at reducing the variance in nominal interest rates reduces the information content of these variables. This has the undesirable effect of destabilizing real interest rates. The researcher demonstrates that nominal interest rate policy rules stabilize the component of the variance in the ex ante real interest rate attributable to the variance in the nominal rate. The variability of the expected inflation rate can, however, be increased by such policy rules, making the net effect of a nominal interest rate policy on the variance in the real interest rate ambiguous.
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Hegji, C.E. Nominal interest rate policy rules and the feasibility of real interest rate control. J Econ Finan 16, 115–124 (1992). https://doi.org/10.1007/BF02919798
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DOI: https://doi.org/10.1007/BF02919798