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Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability

  • Jess Benhabib
  • Stephanie Schmitt-Grohe
  • Martin Uribe

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabilizing properties of interest-rate rules whereby the central bank responds to a measure of past inflation. The consensus view that has emerged is that backward-looking rules contribute to protecting the economy from embarking on expectations-driven fluctuations. A common characteristic of the existing studies that arrive at this conclusion is their focus on local analysis. The contribution of this paper is to conduct a more global analysis.

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Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (2003)
Issue (Month): ()
Pages: 1379-1423

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Handle: RePEc:fip:fedcpr:y:2003:p:1379-1423
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