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Super-Inertial Interest Rate Rules are not Solutions of Ramsey Optimal Policy

Author

Listed:
  • Jean-Bernard Chatelain
  • Kirsten Ralf

Abstract

This paper demonstrates that the equilibrium determined by the commitment of a Central Bank to a non-stationary (?super-inertial?) interest rate rule (where the sum of the parameters of the lags of the interest rate exceeds one and does not depend on the persistence of shocks) does not correspond to the unique bounded solution and the stable equilibrium of Ramsey optimal policy for the new-Keynesian model. It always destabilizes inflation because of the rounding errors and the measurement errors of the parameters of the monetary policy transmission mechanism. By contrast, the commitment of a Central Bank to a stationary interest rate rule rule (where the sum of the parameters of lags of the interest rate is strictly below one and depends on the persistence of shocks) corresponds to the unique bounded solution and the stable equilibrium of Ramsey optimal policy. JEL classification numbers . C61, C62, E43, E44, E47, E52, E58

Suggested Citation

  • Jean-Bernard Chatelain & Kirsten Ralf, 2023. "Super-Inertial Interest Rate Rules are not Solutions of Ramsey Optimal Policy," Revue d'économie politique, Dalloz, vol. 133(1), pages 119-146.
    • Handle: RePEc:cai:repdal:redp_331_0119
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    More about this item

    Keywords

    new-Keynesian model; Ramsey optimal policy; interest-rate smoothing; superinertial rule; stability;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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