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September 2011 issue
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Laséen and Svensson
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Interest Rate Smoothing and "Calvo-Type" Interest Rate Rules: A Comment on Levine, McAdam, and Pearlman (2007)

by Ida Wolden Bachea, Øistein Røislanda, and Kjersti Næss Torstensena,b

Abstract

In a recent paper, Levine, McAdam, and Pearlman (2007) propose a new type of interest rate rule, which they denote a “Calvo-type” rule. The Calvo-type interest rate responds to the discounted sum of current and future rates of inflation. We show that a Calvo-type rule can be derived from a very different assumption than the one used by Levine, McAdam, and Pearlman (2007), namely a preference for interest rate smoothing. In addition to giving an alternative rationale for the Calvo-type rule, we provide additional empirical support for the specification.

JEL Codes: E52, E37, E58.

 
Full article (PDF, 12 pages 168 kb)


a Norges Bank (Central Bank of Norway)
b European University Institute