A proposal for explaining interest rate determination in intermediate macroeconomic courses
Autores: Capó Parrilla, Javier (Universitat de les Illes Balears, Departament d’Economia Aplicada, Facultad de Economía y Empresa. Cra. de Valldemossa, km 7.5. 07122 Palma (Illes Balears), España.) | Lozano, Javier (Universidad de las Islas Baleares. Departamento de Economía Aplicada. Carretera de Valldemossa km. 7,5, 07122. Palma. Islas Baleares. España.)
For several decades now, the interest rate has been the main instrument of monetary policy. Even the new monetary policy instruments that emerged in the aftermath of the Great Recession operate through their effects on interest rates. This paper makes a proposal to explain the determination of interest rates in intermediate macroeconomics courses. It covers a broad set of determinants-both monetary policy (conventional and unconventional) and exogenous-and helps to understand the operation of monetary policy both before and after the great recession. The proposal can be attached as a module to a standard explanatory model of income and inflation determinations where it is assumed that the interest rate is the instrument of monetary policy.