This article conducts a thorough intertemporal analysis of nominal interest rate based monetary policy. Its main contribution is to show how such a policy can have different effects depending on the assumptions made about the saving and borrowing behaviour of firms. We consider two cases: (i) consumers are savers and firms are borrowers and (ii) both consumers and firms are borrowers (the nation as a whole is borrowing from abroad). In one case we confirm conventional wisdom, but in the other case we find there may be unexpected and surprising results. Moreover, our analysis has important implications for both inflation and nominal exchange rate targeting policies.
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Document Type: Research Article
Department of Economics and Institute of Applied Mathematics, Middle East Technical University (METU), Ankara, Turkey
Department of Economics, University of Aberdeen, Edward Wright Building, Old Aberdeen, AB24 3QY, UK
Publication date: 2009-07-01
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