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Interest rate rules, endogenous cycles, and chaotic dynamics in open economies

  • Airaudo, Marco
  • Zanna, Luis-Felipe

We present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on specific characteristics of open economies. In particular, rules that respond to expected future inflation are more prone to induce endogenous cyclical and chaotic dynamics the more open the economy to trade.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 10 ()
Pages: 1566-1584

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:10:p:1566-1584
DOI: 10.1016/j.jedc.2012.06.003
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