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Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies

  • Luis-Felipe Zanna
  • Marco Airaudo

We present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on specific characteristics of open economies. In particular, rules that respond to expected future inflation are more prone to induce endogenous cyclical and chaotic dynamics the more open the economy to trade.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/121.

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Length: 40
Date of creation: 01 May 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/121
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