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Structural Stability of the Generalized Taylor Rule

Author

Listed:
  • William Barnett

    (Department of Economics, University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin)

  • Evgeniya A. Duzhak

    (Zicklin School of Business, Baruch College, City University of New York)

Abstract

This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coefficients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the existence of a period doubling bifurca- tion. As a result, a small change in the parameters (e.g. a more active policy response) can lead to a drastic change in the path of in ation. We demonstrate that while the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations, a hybrid rule exhibits the same pattern of period doubling bifurcations as the basic setup.

Suggested Citation

  • William Barnett & Evgeniya A. Duzhak, 2014. "Structural Stability of the Generalized Taylor Rule," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201404, University of Kansas, Department of Economics, revised Sep 2014.
    • Handle: RePEc:kan:wpaper:201404
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    References listed on IDEAS

    as
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    Cited by:

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    2. Salisu, Afees A. & Gupta, Rangan & Kim, Won Joong, 2022. "Exchange rate predictability with nine alternative models for BRICS countries," Journal of Macroeconomics, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    New Keynesian; Taylor Rule; regime switching; bifurcation analysis; structural stability.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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