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Interest rate rules and macroeconomic stabilization

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  • Mark WEDER

    (School of Economics, the University of Adelaide and Humboldt-Universität zu Berlin, CDMA and CEPR)

Abstract

High degrees of relative risk aversion induce indeterminacy in cash-in-advance economies. This paper finds that Taylor-style policies can pre-empt such sunspot equilibria. Spécifie policy recommendations dépend on the fundamentals of the economy. i.e. the cmpirically true value of coefficient of relative risk aversion.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2006025.

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Length: 20
Date of creation: 01 Jun 2006
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Handle: RePEc:ctl:louvre:2006025

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Keywords: Cash-in-advance economies; Taylor rules; sunspot equilibria;

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  1. Jess Benhabib & Stephanie Schitt-Grohe & Martin Uribe, 2002. "Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability," PIER Working Paper Archive 03-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 14 Feb 2003.
  2. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
  3. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper, Federal Reserve Bank of Cleveland 0009, Federal Reserve Bank of Cleveland.
  4. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262062038, December.
  5. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," NBER Working Papers 9420, National Bureau of Economic Research, Inc.
  6. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  7. Charles T. Carlstrom & Timothy J. Fuerst, 1999. "Forecasts and sunspots: looking back for a better future," Economic Commentary, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Nov.
  8. Weder, Mark, 2003. "Taylor Rules and Macroeconomic Instability or How the Central Bank Can Pre-empt Sunspot Expectations," SFB 373 Discussion Papers, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2003,49, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  9. Stephane Auray & Fabrice Collard & Patrick Feve, 2005. "Habit Persistence, Money Growth Rule and Real Indeterminacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 48-67, January.
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