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Nonlinear inflation expectations and endogenous fluctuations

  • Gomes, Orlando

The standard new Keynesian monetary policy problem is, in its original presentation, a linear model. As a result, only three possibilities are admissible in terms of long term dynamics: the equilibrium may be a stable node, an unstable node or a saddle point. Fixed point stability (a stable node) is generally guaranteed only under an active monetary policy rule. The benchmark model also considers extremely simple assumptions about expectations (perfect foresight is frequently assumed). In this paper, one inquires how a change in the way inflation expectations are modelled implies a change in monetary policy results when an active Taylor rule is taken. By assuming that inflation expectations are constrained by the evolution of the output gap, we radically modify the implications of policy intervention: endogenous cycles, of various periodicities, and chaotic motion will be observable for reasonable parameter values.

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File URL: http://mpra.ub.uni-muenchen.de/2842/1/MPRA_paper_2842.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2842.

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Date of creation: Aug 2006
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Handle: RePEc:pra:mprapa:2842
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  1. Dolado Juan & Pedrero Ramón María-Dolores & Ruge-Murcia Francisco J., 2004. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-34, September.
  2. Branch, William A. & Evans, George W., 2010. "Monetary Policy and Heterogeneous Expectations," SIRE Discussion Papers 2010-32, Scottish Institute for Research in Economics (SIRE).
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  9. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  10. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  11. Tambakis Demosthenes N., 1999. "Monetary Policy with a Nonlinear Phillips Curve and Asymmetric Loss," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(4), pages 1-17, January.
  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  13. RUGE-MURCIA, Francisco J., 2001. "The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment," Cahiers de recherche 2001-22, Universite de Montreal, Departement de sciences economiques.
  14. Christian Jensen, 2006. "Expectations, Learning, and Discretionary Policymaking," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
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