Impacts of Monetary Policy Rates on Interest and Inflation Rates
47 Pages Posted: 19 Dec 2017
Date Written: December 14, 2017
This paper extends previous research on how monetary policy rates impact interest and inflation rates. We develop and apply a system model comprised of joint Fisher-Wicksell effects augmented with the federal funds rate. Theoretical relationships between ex ante and ex post coefficients are specified, dynamic relationships of the model are investigated, and steady state policy rate elasticities of inflation and interest rates are derived. Employing U.S. rate series and state space econometric methods, we estimate time-varying coefficients of the augmented system model. Policy rate elasticities of inflation rates provide insights into the effectiveness of using policy rates to control inflation and influence interest rates. These and other results suggest that dual Fisher and Wicksell effects are important channels of monetary policy rate transmission to interest and inflation rates.
Keywords: interest rates, inflation, monetary policy
JEL Classification: C30, E40, E52
Suggested Citation: Suggested Citation