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Bubble-free interest-rate rules

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  • Loisel, O.

Abstract

This paper designs, for a broad class of rational-expectations dynamic stochastic general-equilibrium models, interest-rate rules which not only ensure the local determinacy of the targeted equilibrium within the neighbourhood of the targeted steady state, but also prevent the economy from gradually leaving this neighbourhood. We show that in most models these interest-rate rules are necessarily forward-looking (i.e. make necessarily the interest rate conditional on the private agents' expectations), while in all models non-forward-looking interest-rate rules exist which ensure only the local determinacy of the targeted equilibrium. We also discuss the robustness of the effectiveness of these rules to departures from various assumptions and show in particular that they can still be effective when the central bank has imperfect knowledge of the model's structural parameters. We finally argue that such rules could also serve as a useful guide in the reflections on the best monetary policy reaction to perceived asset-price bubbles or exchange-rate misalignments.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 161.

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Length: 54 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bfr:banfra:161

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Related research

Keywords: DSGE models ; Interest-rate rules ; Local determinacy ; Global determinacy ; Rational bubbles;

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References

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Cited by:
  1. Adão, Bernardino & Correia, Isabel & Teles, Pedro, 2010. "Short and Long Interest Rate Targets," CEPR Discussion Papers 7935, C.E.P.R. Discussion Papers.
  2. Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2004. "Monetary Policy with Single Instrument Feedback Rules," Working Papers w200419, Banco de Portugal, Economics and Research Department.
  3. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13409, National Bureau of Economic Research, Inc.

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