Imperfections in the financial markets and the optimal interest rate rule
DOI:
https://doi.org/10.29201/peipn.v16i31.21Keywords:
Taylor rule, optimal interest rate, cumulative causationAbstract
This work presents a useful theoretical model to find the interest rate rule that minimizes a function that depends on the variance of the product and the variance of inflation. Ideally, this rule respects the Taylor principle, by which the nominal rate of Policy interest is over-adjusted for inflation and expectations. However, in the presence of imperfect credit markets and/ or a large group of people excluded from the financial sector, the optimal rule may not respect the mentioned principle. Even in these cases, the Macroeconomic model presents stable and defined trajectories for infla-tion and output.
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