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Interest Rate Rules and Macroeconomic Stabilization

  • Mark Weder

    ()

    (School of Economics, University of Adelaide)

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

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2006-01.pdf
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Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2006-01.

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Length: 11 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:adl:wpaper:2006-01
Contact details of provider: Postal: Adelaide SA 5005
Phone: (618) 8303 5540
Web page: http://www.economics.adelaide.edu.au/

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  1. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability," Working Papers 03-4, Federal Reserve Bank of Philadelphia.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  3. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper 0009, Federal Reserve Bank of Cleveland.
  4. 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.
  5. 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.
  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, 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.
  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 J. Fuerst, 1999. "Forecasts and sunspots: looking back for a better future," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
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