Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 159: Monetary Policy and the Fisher Effect

Paul Söderlind ()
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Paul Söderlind: Department of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: Historical estimates of the informational content in the yield curve may not be relevant after a change in monetary policy. This study uses a small dynamic rational expectations model with staggered price setting to study how monetary policy affects the relation between nominal interest rates, inflation expectations, and real interest rates. The benchmark parameters, including the Fed's loss function parameters, are estimated by maximum likelihood on quarterly U.S. data. The policy experiments include stronger inflation targeting and more active monetary policy.

Keywords: Optimal monetary policy; inflation expectations; forward interest rates; Kalman filter estimation

JEL-codes: E31; E43; E52

5 pages, First version: February 1997. Revised: March 4, 1999.

Note: Revised and shortened version of Working Paper No. 159

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