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Interest Rate Rules and Macroeconomic Stabilization

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  • Mark Weder

    (School of Economics, University of Adelaide)

Abstract

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.

Suggested Citation

  • Mark Weder, 2006. "Interest Rate Rules and Macroeconomic Stabilization," School of Economics Working Papers 2006-01, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:2006-01
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2006-01.pdf
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    2. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability," Proceedings, Federal Reserve Bank of Cleveland, pages 1379-1423.
    3. 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.
    4. 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.
    5. 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 249-265, April.
    6. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," Levine's Bibliography 506439000000000394, UCLA Department of Economics.
    7. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    8. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, April.
    9. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Papers (Old Series) 0009, Federal Reserve Bank of Cleveland.
    10. Charles T. Carlstrom & Timothy S. Fuerst, 1999. "Forecasts and sunspots: looking back for a better future," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
    11. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, June.
    12. Christiano, Lawrence J, 2000. "Comment on Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 905-930, November.
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    Cited by:

    1. Mark Weder, 2008. "Money growth rules as stabilization policies in open economies," International Economic Journal, Taylor & Francis Journals, vol. 22(4), pages 525-537.

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    More about this item

    Keywords

    cash-in-advance economies; Taylor rules; sunspot equilibria;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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