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Interest rate rules and macroeconomic stabilization

  • Mark Weder

High degrees of relative risk aversion induce indeterminacy in cashin- advance economies. This paper finds that Taylor-style policies can preempt such sunspot equilibria. Specific policy recommendations depend on the fundamentals of the economy, i.e. the empirically true value of coefficient of relative risk aversion.

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Article provided by De Boeck Université in its journal Recherches économiques de Louvain.

Volume (Year): 72 (2006)
Issue (Month): 2 ()
Pages: 195-204

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Handle: RePEc:cai:reldbu:rel_722_0195
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  1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  2. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper 0009, Federal Reserve Bank of Cleveland.
  3. Stephane Auray & Fabrice Collard & Patrick Feve, 2005. "Habit Persistence, Money Growth Rule and Real Indeterminacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 48-67, January.
  4. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability," Departmental Working Papers 200304, Rutgers University, Department of Economics.
  5. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, June.
  6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  7. Weder, Mark, 2003. "Taylor Rules and Macroeconomic Instability or How the Central Bank Can Pre-empt Sunspot Expectations," SFB 373 Discussion Papers 2003,49, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  8. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," NBER Working Papers 9420, National Bureau of Economic Research, Inc.
  9. Charles T. Carlstrom & Timothy S. Fuerst, 1999. "Forecasts and sunspots: looking back for a better future," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
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