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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Investment and interest rate policy: a discrete time analysis
Charles T. Carlstrom
Timothy S. Fuerst
Abstract

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.


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Charles T. Carlstrom & Timothy S. Fuerst, Investment and interest rate policy: a discrete time analysis, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 0320, 2003.
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Keywords: Interest rates ; Monetary policy ; Banks and banking; Central
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