Modeling the dynamics of interest rate policy: the dynamic impact of the chosen path of the nominal interest rate on the real interest rate

Inhalt:
Nominal interest rate policy is one of the most basic financial regulation tools in the world today. What kind of impact do interest rate hikes, rate cuts, and various central bank interest rate strategies have on the real economy? Are their effects policy stable? We construct differential equations containing the dynamics of four typical nominal interest rate strategies and real interest rates under the ideal assumption of a no-arbitrage economy and show the connection between them through system stability analysis and mathematical methods such as initial value selection and numerical simulation. The model reveals that the interest rate system is often unstable, the evolution curve of the real interest rate is highly sensitive to the path of the nominal interest rate, and the central bank cannot fix the nominal interest rate in the long run, and the four typical interest rate strategies can be flexibly switched in practice.