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Backward- versus Forward-Looking Feedback Interest Rate Rules

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Abstract

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

Suggested Citation

  • Hippolyte d'Albis & Emmanuelle Augeraud-Véron & Hermen Jan Hupkes, 2012. "Backward- versus Forward-Looking Feedback Interest Rate Rules," Documents de travail du Centre d'Economie de la Sorbonne 12051, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:12051
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    More about this item

    Keywords

    Interest rate rules; indeterminacy; functionnal differential equations;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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