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An Analytical and Numerical Search for Bifurcations in Open Economy New Keynesian Models

  • William Barnett

    (Department of Economics, The University of Kansas)

  • Unal Eryilmaz

    (OECD)

We explore bifurcation phenomena in the open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy framework brings about more complex dynamics, along with a wider variety of qualitative behaviors and policy responses. Introducing parameters related to the open economy structure affects the values of bifurcation parameters and changes the location of bifurcation boundaries. As a result, the stratification of the confidence region, as previously seen in closed-economy New Keynesian models, remains an important research and policy risk to be considered in the context of the open-economy New Keynesian functional structures. In fact, econometrics and optimal policy design become more complex within an open economy. Dynamical inferences need to be qualified by the risk of bifurcation boundaries crossing the confidence regions. Policy design needs to take into consideration that a change in monetary policy can produce an unanticipated bifurcation, without adequate prior econometrics research.

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File URL: http://www2.ku.edu/~kuwpaper/2009Papers/201210.pdf
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Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201210.

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Length: 27 pages
Date of creation: Aug 2012
Date of revision: Aug 2012
Handle: RePEc:kan:wpaper:201210
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  1. Sanjibani Banerjee & William Barnett & Evgeniya Duzhak & Ramu Gopalan, 2011. "Bifurcation Analysis of Zellner's Marshallian Macroeconomic Model," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201102, University of Kansas, Department of Economics, revised Apr 2011.
  2. Campbell Leith & Ioana Moldovan & Raffaele Rossi, 2012. "Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 416-435, July.
  3. James B. Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  4. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316.
  5. Marco Airaudo & Luis-Felipe Zanna, 2010. "Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies," Carlo Alberto Notebooks 171, Collegio Carlo Alberto.
  6. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  7. Ronald Schettkat & Rongrong Sun, 2008. "Monetary Policy and European Unemployment," Schumpeter Discussion Papers sdp08002, Universit├Ątsbibliothek Wuppertal, University Library.
  8. William Barnett & Evgeniya Duzhak, 2010. "Empirical assessment of bifurcation regions within New Keynesian models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(1), pages 99-128, October.
  9. Demirel, Ufuk Devrim, 2010. "Macroeconomic stabilization in developing economies: Are optimal policies procyclical?," European Economic Review, Elsevier, vol. 54(3), pages 409-428, April.
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