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Working Paper

Investment and Interest Rate Policy: A Discrete Time Analysis

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This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.
12.20.2003ISSN 2573-7953 WP 03-20DOI 10.26509/frbc-wp-200320
Keywords interest rates, monetary policy, central banking
JEL Classification Codes E4, E5

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Carlstrom, Charles T., and Timothy S. Fuerst. 2003. “Investment and Interest Rate Policy: A Discrete Time Analysis.” Federal Reserve Bank of Cleveland, Working Paper No. 03-20. https://doi.org/10.26509/frbc-wp-200320