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Bounded Interest Rate Feedback Rules in Continuous-Time

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  • d'Albis, Hippolyte
  • Augeraud-Véron, Emmanuelle
  • Hupkes, Hermen Jan

Abstract

This paper analyses the dynamic consequences of interest rate feedback rules in a flexible-price model where money enters the utility function. Two alternative rules are considered based on past or predicted inflation rates. The main feature is to consider inflation rates that are selected over a bounded time horizon. We prove that if the Central Bank’s forecast horizon is not too long, an active and forward-looking monetary policy is not destabilizing: the equilibrium trajectory is unique and monotonic. This is an advantage with respect to active and backward-looking policies that are shown to lead to a unique but fluctuating dynamic.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45424.

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Date of creation: 07 Mar 2013
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Handle: RePEc:pra:mprapa:45424

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Keywords: Interest Rate Rules; Indeterminacy; Functionnal Equations;

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References

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  1. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(3), pages 565 - 615.
  2. Bill Dupor, 2000. "Investment and Interest Rate Policy," Econometric Society World Congress 2000 Contributed Papers 0007, Econometric Society.
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  6. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
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  8. Batini, Nicoletta & Justiniano, Alejandro & Levine, Paul & Pearlman, Joseph, 2006. "Robust inflation-forecast-based rules to shield against indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1491-1526.
  9. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  10. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
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  17. 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.
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  19. Nicoletta Batini & Joseph Pearlman, 2002. "Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules," Discussion Papers, Monetary Policy Committee Unit, Bank of England 08, Monetary Policy Committee Unit, Bank of England.
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  22. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
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  25. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2004. "Indeterminacy with Inflation-Forecast-Based Rules in a Two-Bloc Model," School of Economics Discussion Papers, School of Economics, University of Surrey 0204, School of Economics, University of Surrey.
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  27. Hippolyte d'Albis & Emmanuelle Augeraud-Véron & Hermen Jan Hupkes, 2012. "Discontinuous Initial Value Problems for Functional Differential-Algebraic Equations of Mixed Type," Documents de travail du Centre d'Economie de la Sorbonne 12043, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
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  30. Stefano Eusepi, 2005. "Comparing forecast-based and backward-looking Taylor rules: a "global" analysis," Staff Reports 198, Federal Reserve Bank of New York.
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  32. repec:hal:journl:halshs-00786419 is not listed on IDEAS
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Cited by:
  1. d'Albis, Hippolyte & Augeraud-Véron, Emmanuelle & Hupkes, Herman Jan, 2014. "Multiple Solutions in Systems of Functional Differential Equations," MPRA Paper 54777, University Library of Munich, Germany.

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