On the optimality of interest rate smoothing

Sergio Rebelo*, Danyang Xie

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

27 Scopus citations

Abstract

This paper studies some continuous-time cash-in-advance models in which interest rate smoothing is optimal. We consider both deterministic and stochastic models. In the stochastic case we obtain two results of independent interest: (i) we study what is, to our knowledge, the only version of the neoclassical model under uncertainty that can be solved in closed form in continuous time; and (ii) we show how to characterize the competitive equilibrium of a stochastic continuous time model that cannot be computed by solving a planning problem. We also discuss the scope for monetary policy to improve welfare in an economy with a suboptimal real competitive equilibrium, focusing on the particular example of an economy with externalities.

Original languageEnglish (US)
Pages (from-to)263-282
Number of pages20
JournalJournal of Monetary Economics
Volume43
Issue number2
DOIs
StatePublished - Apr 1999

Keywords

  • E31
  • E48
  • E52
  • Growth
  • Inflation
  • Interest rate smoothing
  • Monetary policy
  • O42

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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