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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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  1. d’Albis, Hippolyte & Augeraud-Véron, Emmanuelle & Hupkes, Hermen Jan, 2014. "Multiple solutions in systems of functional differential equations," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 50-56.
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  12. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2004. "Indeterminacy with inflation-forecast-based rules in a two-bloc model," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 797, Board of Governors of the Federal Reserve System (U.S.).
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  20. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1379-1423.
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  22. 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, Elsevier, vol. 30(9-10), pages 1491-1526.
  23. BOUCEKKINE, Raouf & FABBRI, Giorgio & PINTUS, Patrick, . "On the optimal control of a linear neutral differential equation arising in economics," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  24. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Timing and real indeterminacy in monetary models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 285-298, April.
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Cited by:
  1. d’Albis, Hippolyte & Augeraud-Véron, Emmanuelle & Hupkes, Hermen Jan, 2014. "Multiple solutions in systems of functional differential equations," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 50-56.

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