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Backward- versus Forward-Looking Feedback Interest Rate Rules

  • Hippolyte D'Albis

    ()

    (Axe Macroéconomie - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

  • Emmanuelle Augeraud-Véron

    ()

    (MIA - Mathématiques, Image et Applications - Université de La Rochelle)

  • Hermen Jan Hupkes

    ()

    (University of Missouri - Columbia - Mathematics Department)

This paper proposes conditions for the existence and uniqueness of solutions to systems of differential equations with delays or advances in which some variables are non-predetermined. An application to the issue of optimal interest rate policy is then develop in a flexible-price model where money enters the utility function. Central banks have the choice between a rule that depends on past inflation rates or one that depends on predicted interest rates. When inflation rates are selected over a bounded time interval, the problem is characterized by a system of delay or advanced differential equations. We then prove that if the central bank's forecast horizon is not too long, an active and forward-looking monetary policy is not too destabilizing : the equilibrium trajectory is unique and monotonic.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00721289.

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Date of creation: Jun 2012
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Handle: RePEc:hal:cesptp:halshs-00721289
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00721289
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  1. BOUCEKKINE, Raouf & DE LA CROIX, David & LICANDRO, Omar, . "Modelling vintage structures with DDEs: principles and applications," CORE Discussion Papers RP 1758, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
  3. Stefano Eusepi, 2005. "Comparing forecast-based and backward-looking Taylor rules: a "global" analysis," Staff Reports 198, Federal Reserve Bank of New York.
  4. BOUCEKKINE, Raouf & LICANDRO, Omar & PUCH, Luis A. & DEL RIO, Fernando, . "Vintage capital and the dynamics of the AK model," CORE Discussion Papers RP 1757, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Stephanie Schmitt-Grohe & Jess Benhabib & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March.
  6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  7. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  8. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Avoiding Liquidity Traps," CEPR Discussion Papers 2948, C.E.P.R. Discussion Papers.
  9. Hippolyte D'Albis & Emmanuelle Augeraud-Véron & Alain Venditti, 2009. "Business cycle fluctuations and learning-by-doing externalities in a one-sector model," Working Papers halshs-00432267, HAL.
  10. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
  11. repec:fda:fdaddt:2004-07 is not listed on IDEAS
  12. Hippolyte D'Albis & Emmanuelle Augeraud-Véron & Hermen Jan Hupkes, 2012. "Discontinuous initial value problems for functional differential-algebraic equations of mixed type," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00759204, HAL.
  13. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  14. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  15. 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.
  16. Mauro Bambi, 2006. "Endogenous growth and time to build: the AK case," Computing in Economics and Finance 2006 77, Society for Computational Economics.
  17. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  18. Bill Dupor, 2000. "Investment and Interest Rate Policy," Econometric Society World Congress 2000 Contributed Papers 0007, Econometric Society.
  19. Gray, Malcolm R & Turnovsky, Stephen J, 1979. "Expectational Consistency, Informational Lags, and the Formulation of Expectations in Continuous Time Models," Econometrica, Econometric Society, vol. 47(6), pages 1457-74, November.
  20. Benhabib, Jess, 2004. "Interest Rate Policy in Continuous Time with Discrete Delays," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 1-15, February.
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