Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies
AbstractIn this paper we present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to changes in inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on particular characteristics of open economies, including the degree of trade openness and the degree of exchange rate pass-through into import prices. For instance, in our model, we find that a rule that responds to expected future inflation is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 171.
Length: 40 pages
Date of creation: 2010
Date of revision:
Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Endogenous Fluctuations;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-05 (All new papers)
- NEP-CBA-2011-02-05 (Central Banking)
- NEP-DGE-2011-02-05 (Dynamic General Equilibrium)
- NEP-MAC-2011-02-05 (Macroeconomics)
- NEP-MON-2011-02-05 (Monetary Economics)
- NEP-OPM-2011-02-05 (Open Economy Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Fiore, Fiorella & Liu, Zheng, 2005. "Does trade openness matter for aggregate instability?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1165-1192, July.
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