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Interest Rate Targeting in a Small Open Economy: The Predetermined Exchange Rates Case
Author:
Mr. Guillermo Calvo null

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Mr. Carlos A. Végh Gramont null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1990: Issue 021
Language:
English
Publication Date:
01 Mar 1990
DOI:
https://doi.org/10.5089/9781451921427.001
ISBN:
9781451921427
ISSN:
1018-5941
Pages:
32
Keywords:
WP; nominal interest rate
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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An important hurdle in analyzing interest rate targeting is that standard models usually lead to price level or inflation rate indeterminacy. This paper develops a simple framework in which such problems do not arise because the bonds whose interest rate is controlled provide liquidity services. This framework is used to examine interest rate targeting in a small open economy under predetermined exchange rates. A permanent increase in the interest rate has no real effects. In contrast, a temporary increase in the interest rate leads to higher consumption and to a current account deficit that worsens over time.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund