Skip to Main Content

Economic Quarterly

Spring 1996

Limits on Interest Rate Rules in the IS Model

Robert G. King and William Kerr

There are a few limits on interest rate rules in the textbook sticky price macroeconomic model. A central bank can even use a 'pure' rule that sets the interest rate arbitrarily. However, modern consumption and investment theory suggests that expectations of future output enter the IS schedule. With this modification, a pure interest rate rule is either infeasible or undesirable. Yet, interest rate rules that target the price level or the inflation rate can be feasible.

Subscribe to Economic Quarterly

Receive an email notification when Economic Quarterly is posted online:

Subscribe to Economic Quarterly

phone Contact Us

Lisa Kenney (804) 697-8179