Inflation and interest rates in the presence of a cost channel, wealth effect and agent heterogeneity

S Z Ali; Sajid Anwar

doi:10.1016/j.econmod.2012.11.022

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Inflation and interest rates in the presence of a cost channel, wealth effect and agent heterogeneity

Journal article

Open access

Peer reviewed

Inflation and interest rates in the presence of a cost channel, wealth effect and agent heterogeneity

S Z Ali and Sajid Anwar

Economic Modelling, Vol.31(1), pp.286-296

2013

DOI: https://doi.org/10.1016/j.econmod.2012.11.022

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Abstract

inflation targeting

interest rate policy

monetary commitment

Taylor's rule

cost channel

wealth effect

Agent heterogeneity

As far as the control of inflation is concerned, the interest rate is the most important monetary instrument. This paper examines the effectiveness of the interest rate policy in controlling inflation. The model utilized in this paper considers both demand and supply side effects of interest rate policy. These effects are used to derive not only the relevant impulse response functions but also the welfare loss to the society that arises from the supply side shocks. Based on their ability to control inflation and minimization of the overall welfare loss to the society, three policies are compared: (i) monetary policy with commitment, (ii) Taylor's rule, and (iii) inflation targeting. We argue that, in the presence of a cost channel, it is imperative that the interest rate policy is used with restraint. Our results also suggest that ignoring the cost channel of monetary policy can lead to significant under-estimation of the social welfare loss.

Details

Title: Inflation and interest rates in the presence of a cost channel, wealth effect and agent heterogeneity
Authors: S Z Ali (Author) - Bond University
Sajid Anwar (Author) - University of the Sunshine Coast - Faculty of Arts and Business
Publication details: Economic Modelling, Vol.31(1), pp.286-296
Publisher: Elsevier BV, North-Holland
Date published: 2013
DOI: 10.1016/j.econmod.2012.11.022
ISSN: 0264-9993
Organisation Unit: School of Business and Creative Industries; Indigenous and Transcultural Research Centre; University of the Sunshine Coast, Queensland; USC Business School - Legacy
Language: English
Record Identifier: 99450021202621
Output Type: Journal article

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