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Taylor Rules and Macroeconomic Instability or How the Central Bank Can Preempt Sunspot Expectations

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  • Weder, Mark

Abstract

This paper derives new results on the effects of employing Taylor rules in economies that are subject to real market imperfections such as production externalities. Policies which respond to output movements can block sunspot equilibria that arise from the increasing returns. The paper also finds that rules which should be chosen (avoided) in perfect market environments often yield (ensure) multiple (unique) rational expectations solutions in alternative settings. Therefore, exact knowledge on the degree of market imperfection may be integral for robust policy advice.

Suggested Citation

  • Weder, Mark, 2006. "Taylor Rules and Macroeconomic Instability or How the Central Bank Can Preempt Sunspot Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 655-677, April.
    • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:3:p:655-677
    DOI: 10.1353/mcb.2006.0049
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    1. repec:hum:wpaper:sfb649dp2005-027 is not listed on IDEAS
    2. repec:ebl:ecbull:v:5:y:2004:i:11:p:1-7 is not listed on IDEAS
    3. Mark Weder, 2006. "Interest rate rules and macroeconomic stabilization," Recherches économiques de Louvain, De Boeck Université, vol. 72(2), pages 195-204.
    4. Donald A. R., George & Les, Oxley, 2013. "Rational Expectations Dynamics: A Methodological Critique," SIRE Discussion Papers 2013-45, Scottish Institute for Research in Economics (SIRE).
    5. Kevin X.D. Huang & Qinglai Meng, 2014. "Returns to Scale, Market Power, and the Nature of Price Rigidity in New Keynesian Models with Self‐Fulfilling Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 293-320, March.
    6. Chen, Shu-Hua, 2015. "Macroeconomic (In)Stability Of Interest Rate Rules In A Model With Banking System And Reserve Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 19(7), pages 1476-1508, October.
    7. Mark Weder, 2008. "Sticky Prices and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 1073-1082, August.
    8. Mark Weder, 2008. "Sticky Prices and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 1073-1082, August.
    9. Mark Weder, 2008. "Money growth rules as stabilization policies in open economies," International Economic Journal, Taylor & Francis Journals, vol. 22(4), pages 525-537.
    10. Olivier Loisel, 2006. "Bubble-free interest-rate rules," Working papers 161, Banque de France.
    11. Schabert, Andreas & Stoltenberg, Christian, 2005. "Money demand and macroeconomic stability revisited," SFB 649 Discussion Papers 2005-027, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.

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