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Active Interest Rate Rules and the Role of Stabilization Policy R&D Tax Credits

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  • Vivaldo M. Mendes

    ()
    (ISCTE - Department of Economics and UNIDE-ERC)

  • Diana A. Mendes

    ()
    (ISCTE - Department of Quantitative Methods and UNIDE-StatMath)

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    Abstract

    In a series of papers, Benhabib, Schmitt-Grohé and Uribe (2001a, 2001b, 2001c, 2002 and 2004) have shown that active interest rules may lead to very unexpected consequences: indeterminacy, deflation traps, large cyclical instability, and can even lead to chaotic dynamics under standard sets of parameter values. This paper explores this particular model model and puts forward four basic points: (i) the model developed by Benhabib and associates seems to suffer from serious drawbacks to be used as a theoretical benchmark to guide optimal monetary policy, as the more aggressive the central bank becomes, the more unstable the economy will be; (ii) the time span required to achieve successful control is generally small, by linear feedback techniques – the OGY method – without producing modifications to the original model, apart from locally changing its type of stability; (iii) ignorance about the true state of initial conditions are not a serious impediment to obtain control of the chaotic dynamics in the model; (iv) we argue that the conventional view of economic policy in nonlinear general equilibrium models – when endogenous fluctuations exist in optimizing models, the associated policy advice is laissez—faire – seems to be based on a misconception of chaos in general, and on the control of chaos in particular.

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    File URL: http://bru-unide.iscte.pt/RePEc/pdfs/ERCwp0208.pdf
    File Function: Second draft, 2007
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    Bibliographic Info

    Paper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 1 with number ercwp0208.

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    Length: 25 pages
    Date of creation: 15 Sep 2006
    Date of revision:
    Handle: RePEc:isc:iscwp1:ercwp0208

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    Web page: http://bru-unide.iscte.pt/
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    Related research

    Keywords: Optimal monetary policy; Interest Rate Rules; Chaos Control; Endogenous Fluctuations and Stabilization;

    References

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    1. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
    2. William Barnett & Alfredo Medio & Apostolos Serletis, 2012. "Nonlinear And Complex Dynamics In Economics," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201223, University of Kansas, Department of Economics, revised Sep 2012.
    3. Marco Airaudo & Luis-Felipe Zanna, 2004. "Endogenous Fluctuations in Open Economies: the Perils of Taylor Rules Revisited," Econometric Society 2004 Latin American Meetings 80, Econometric Society.
    4. Augeraud-Veron E. & Augier L., 2001. "Stabilizing Endogenous Fluctuations with Fiscal Policies: Global Analysis on Piecewise Continuous Dynamical Systems," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(1), pages 1-18, April.
    5. Michele Boldrin & Michael Woodford, 1988. "Equilibruim Models Displaying Endogenous Fluctuations and Chaos: A Survey," UCLA Economics Working Papers 530, UCLA Department of Economics.
    6. Marta Aloi & Hans Jorgen Jacobsen & Teresa Lloyd Braga, 1998. "Endogenous business cycles and stabilization policies," Economics Working Papers 476, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2000.
    7. Thomas Seegmuller, 2003. "Endogenous fluctuations and public services in a simple OLG economy," Economics Bulletin, AccessEcon, vol. 5(10), pages 1-7.
    8. Christiano, Lawrence J. & G. Harrison, Sharon, 1999. "Chaos, sunspots and automatic stabilizers," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 3-31, August.
    9. Michael Kopel, 1997. "Improving the performance of an economic system: Controlling chaos," Journal of Evolutionary Economics, Springer, vol. 7(3), pages 269-289.
    10. Guo, Jang-Ting & Lansing, Kevin J., 2002. "Fiscal Policy, Increasing Returns, And Endogenous Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(05), pages 633-664, November.
    11. Holyst, Janusz A, et al, 1996. "How to Control a Chaotic Economy?," Journal of Evolutionary Economics, Springer, vol. 6(1), pages 31-42, February.
    12. James Bullard & Alison Butler, 1992. "Nonlinearity and chaos in economic models: implications for policy decisions," Working Papers 1991-002, Federal Reserve Bank of St. Louis.
    13. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    14. repec:ebl:ecbull:v:5:y:2003:i:10:p:1-7 is not listed on IDEAS
    15. Kaas, Leo, 1998. "Stabilizing chaos in a dynamic macroeconomic model," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 313-332, January.
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