This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Jess Benhabib
Stephanie Schmitt-Grohe
Martin Uribe

Additional information is available for the following registered author(s):

Abstract

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabilizing properties of interest-rate rules whereby the central bank responds to a measure of past inflation. The consensus view that has emerged is that backward-looking rules contribute to protecting the economy from embarking on expectations-driven fluctuations. A common characteristic of the existing studies that arrive at this conclusion is their focus on local analysis. The contribution of this paper is to conduct a more global analysis. We find that backward-looking interest-rate feedback rules do not guarantee uniqueness of equilibrium. We present examples in which for plausible parameterizations attracting equilibrium cycles exist. The paper also contributes to the quest for policy rules that guarantee macroeconomic stability globally. Our analysis indicates that policy rules whereby the interest rate is set as a function of the past interest rate and current inflation are likely to ensure global stability provided that the coefficient on lagged interest rates is greater than unity.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2003/wp03-4.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-4.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedpwp:03-4

Contact details of provider:
Postal: 10 Independence Mall, Philadelphia, PA 19106-1574
Web page: http://www.philadelphiafed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.phil.frb.org/econ/wps/index.html

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Interest rates;

Other versions of this item:

This paper has been announced in the following NEP Reports: References listed on IDEAS
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.:
  1. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "Chaotic Interest Rate Rules," Computing in Economics and Finance 2001 259, Society for Computational Economics.
    Other versions:
  2. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 83-103, February. [Downloadable!] (restricted)
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  4. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
    Other versions:
  5. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
    Other versions:
  6. Friedman, Benjamin M, 1988. "Monetary Policy without Quantity Variables," American Economic Review, American Economic Association, vol. 78(2), pages 440-45, May. [Downloadable!] (restricted)
  7. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January. [Downloadable!] (restricted)
    Other versions:
  9. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February. [Downloadable!] (restricted)
  10. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," Levine's Bibliography 506439000000000394, UCLA Department of Economics. [Downloadable!]
    Other versions:
  11. Laurence Ball, 2002. "Short-run Money Demand," Economics Working Paper Archive 481, The Johns Hopkins University,Department of Economics. [Downloadable!]
    Other versions:
  12. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
    Other versions:
  13. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper 0009, Federal Reserve Bank of Cleveland. [Downloadable!]
  14. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Dupor, Bill, 2001. "Investment and Interest Rate Policy," Journal of Economic Theory, Elsevier, vol. 98(1), pages 85-113, May. [Downloadable!] (restricted)
  16. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies. [Downloadable!]
    Other versions:
  17. Brian Sack, 1998. "Uncertainty, learning, and gradual monetary policy," Finance and Economics Discussion Series 1998-34, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  18. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March. [Downloadable!] (restricted)
    Other versions:
  19. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March. [Downloadable!] (restricted)
    Other versions:
  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  21. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  22. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June. [Downloadable!] (restricted)
    Other versions:
  23. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1061-79, October.
  24. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Oxford University Press, vol. 12(4), pages 517-33, December.
  25. Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Liquidity Traps with Global Taylor Rules," Departmental Working Papers 200014, Rutgers University, Department of Economics. [Downloadable!]
    Other versions:
  26. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  27. Schmitt-Grohe, Stephanie & Uribe, Martin, 2000. "Price level determinacy and monetary policy under a balanced-budget requirement," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 211-246, February. [Downloadable!] (restricted)
    Other versions:
  28. Taylor, J.B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by European Central Bank," Papers 649, Stockholm - International Economic Studies.
  29. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September. [Downloadable!] (restricted)
  30. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. Stefano Eusepi, 2008. "Central bank transparency and nonlinear learning dynamics," Staff Reports 342, Federal Reserve Bank of New York. [Downloadable!]
  2. Jorge Hermann & Rómulo Chumacero, 2005. "No Estaba Muerta, ...: La Teoría Cuantitativa y la Relación entre Dinero e Inflación," Working Papers Central Bank of Chile 324, Central Bank of Chile. [Downloadable!]
  3. Mark WEDER, 2006. "Interest rate rules and macroeconomic stabilization," Discussion Papers (REL - Recherches Economiques de Louvain) 2006025, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
    Other versions:
  4. Andreas Schabert & Christian Stoltenberg, 2005. "Money demand and macroeconomic stability revisited," Working Paper Series 458, European Central Bank. [Downloadable!]
    Other versions:
  5. Jesus Vazquez, 2004. "Does the Term Spread Play a Role in the Fed's Reaction Function? An Empirical Investigation," Computing in Economics and Finance 2004 52, Society for Computational Economics. [Downloadable!]
  6. Jesús Vazquez, 2004. "Does the Term Spread play a role in the FED\'S reaction function? ," DFAEII Working Papers 200402, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  7. Paolo Angelini & Paolo Del Giovane & Stefano Siviero & Daniele Terlizzese, 2008. "Monetary Policy in a Monetary Union: What Role for Regional Information?," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 1-28, September. [Downloadable!]
  8. Stefano Eusepi, 2005. "Central bank transparency under model uncertainty," Staff Reports 199, Federal Reserve Bank of New York. [Downloadable!]
  9. Weder, Mark, 2003. "Taylor Rules in Practice: How Central Banks can Intercept Sunspot Expectations," CEPR Discussion Papers 3899, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Gerhard Sorger, 2005. "Active and Passive Monetary Policy in an Overlapping Generations Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 731-748, July. [Downloadable!] (restricted)
  11. Jesús Vazquez, 2003. "The role of the term spread in an augmented Taylor rule: An empirical investigation," DFAEII Working Papers 200307, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  12. Piero Ferri & Anna Maria Variato, 2007. "Endogenous Cycles, Debt and Monetary Policy," Working Papers 0703, University of Bergamo, Department of Economics. [Downloadable!]
  13. James Bullard & Kaushik Mitra, 2003. "Determinacy, learnability, and monetary policy inertia," Working Papers 2000-030, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  14. Tommy Sveen & Lutz Weinke, 2004. "Firm-Specific Investment, Sticky Prices, and the Taylor Principle," Economics Working Papers 780, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  15. Ramón María-Dolores & Jesús Vázquez, 2004. "The New Keynesian Monetary Model: Does it Show the Comovement...?," DFAEII Working Papers 200405, University of the Basque Country - Department of Foundations of Economic Analysis II, revised 02 May 2008. [Downloadable!]
  16. Robert Dittmar & William T. Gavin, 2004. "Inflation-targeting, price-path targeting and indeterminacy," Working Papers 2004-007, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? Each page is provided with a technical contact, in case something is not right with the supplied information. See under "publisher info".

This page was last updated on 2009-11-18.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.