ABSTRACT
Modern central banks constantly manipulate interest rates in order to fine tune economic activity and maintain a low level of inflation. As illustrated more clearly in chapter 6, the way central bankers set policy rates depends on their theoretical framework and political considerations but, overall, two categories of behavior can be distinguished. One type of behavior involves moving nominal interest rates up and down until the interest rates affect the economy to the satisfaction of central bankers. Another type involves targeting a specific real interest rate that is assumed to be the “neutral” rate.
