Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Sep, 2024, Volume 92, Issue 5

Robust Real Rate Rules

https://doi.org/10.3982/ECTA21069
p. 1521-1551

Tom D. Holden

Central banks wish to avoid self‐fulfilling fluctuations. Interest rate rules with a unit response to real rates achieve this under the weakest possible assumptions about the behavior of households and firms. They are robust to household heterogeneity, hand‐to‐mouth consumers, non‐rational household or firm expectations, active fiscal policy, and to any form of intertemporal or nominal‐real links. They are easy to employ in practice, using inflation‐protected bonds to infer real rates. With a time‐varying short‐term inflation target, they can implement an arbitrary inflation path, including optimal policy. This provides a way to translate policy makers' desired path for inflation into one for nominal rates. U.S. Federal Reserve behavior is remarkably close to that predicted by a real rate rule, given the desired inflation path of U.S. monetary policy makers. Real rate rules work thanks to the key role played by the Fisher equation in monetary transmission.


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Supplemental Material

Supplement to "Robust Real Rate Rules"

Tom D. Holden

This supplement contains material not found within the manuscript.

Supplement to "Robust Real Rate Rules"

Tom D. Holden

The replication package for this paper is available at https://doi.org/10.5281/zenodo.11198781. The Journal checked the data and codes included in the package for their ability to reproduce the results in the paper and approved online appendices.