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Chaotic Interest-Rate Rules

  • Jess Benhabib
  • Stephanie Schmitt-Grohé
  • Martín Uribe

When the Central Bank sets nominal rates as a a non-decreasing function of the inflation rate to stabilize the economy, that is it uses a Taylor Rule, the zero lower bound on interest rates may result in multiple equilibria and a liquidity trap. However, if fiscal policy is non-Ricardian, or alternatively if monetary policy targets the growth rate of money when inflation is too low, in certain cases the uniqueness of the desirable equilibrium can be restored. This suggests the use of non-Ricardian fiscal policies for stabilization purposes. However, in this paper we show that such policies may fail in models calibrated to the US economy. While local uniqueness of all steady states may be achieved, bounded chaotic multiple equilibria in nominal interest rates and the inflation rate may well emerge as a result of Taylor rules despite non-Ricardian policies

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 2 (May)
Pages: 72-78

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:2:p:72-78
Note: DOI: 10.1257/000282802320189032
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