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Interest Rate Rules Ensuring Strong Local Equilibrium Determinacy

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  • Olivier Loisel

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Abstract

In this paper we look for interest rate rules ensuring strong local equilibrium determinacy,i.e. making sure that there is a unique equilibrium starting out in the neighbourhood of thesteady state and that this equilibrium remains constantly in that neighbourhood. We showin a general framework that such interest rate rules exist and in the more specific frameworkof the canonical New Keynesian model that they are necessarily forward-looking, that is tosay that they make the nominal interest rate conditional on the private agents’ expectations.We also characterize the set of such interest rate rules implementing the optimal equilibriumunder discretion or under commitment (for a closed economy or a small open economy witha flexible exchange rate) or the fixed exchange rate equilibrium (for a small open economy)in this model.

Suggested Citation

  • Olivier Loisel, 2004. "Interest Rate Rules Ensuring Strong Local Equilibrium Determinacy," Working Papers 2004-03, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2004-03
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    References listed on IDEAS

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    1. 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.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, March.
    4. Tommaso Monacelli, 2003. "Commitment, Discretion and Fixed Exchange Rates in an Open Economy," Working Papers 233, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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    Cited by:

    1. Olivier Loisel, 2006. "Bubble-free interest-rate rules," Working papers 161, Banque de France.

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