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Barbara Annicchiarico and Alessandro Piergallini
''Inflation shocks and interest rate rules''
( 2006, Vol. 5 No.19 )
Recent empirical evidence by Fair (2002, 2005) and Giordani (2003) shows that a positive inflation shock with the nominal interest rate held constant has contractionary effects. These results cannot be reconciled with the standard ‘New Synthesis' literature. This paper reconsiders the effects of inflation shocks in a simple New Keynesian framework extended to include wealth effects. It is shown that, following an inflation shock, the decline of output coupled with passive interest rate rules is not puzzling.
Keywords: Inflation Shocks
JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Manuscript Received : Dec 09 2006 Manuscript Accepted : Dec 12 2006

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