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Bounded Interest Rate Feedback Rules in Continuous-Time

  • d'Albis, Hippolyte
  • Augeraud-Véron, Emmanuelle
  • Hupkes, Hermen Jan

This paper analyses the dynamic consequences of interest rate feedback rules in a flexible-price model where money enters the utility function. Two alternative rules are considered based on past or predicted inflation rates. The main feature is to consider inflation rates that are selected over a bounded time horizon. We prove that if the Central Bank’s forecast horizon is not too long, an active and forward-looking monetary policy is not destabilizing: the equilibrium trajectory is unique and monotonic. This is an advantage with respect to active and backward-looking policies that are shown to lead to a unique but fluctuating dynamic.

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File URL: https://mpra.ub.uni-muenchen.de/45424/1/MPRA_paper_45424.pdf
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File URL: https://mpra.ub.uni-muenchen.de/49969/1/MPRA_paper_45424.pdf
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File URL: https://mpra.ub.uni-muenchen.de/52145/1/MPRA_paper_52145.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45424.

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Date of creation: 07 Mar 2013
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Handle: RePEc:pra:mprapa:45424
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  1. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June.
  2. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  3. Paul Levine & Peter McAdam & Joseph Pearlman, 2007. "Inflation-Forecast-Based Rules and Indeterminacy: A Puzzle and a Resolution," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 77-110, December.
  4. Batini, Nicoletta & Nelson, Edward, 2001. "Optimal horizons for inflation targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 891-910, June.
  5. Stefano Eusepi, 2005. "Comparing forecast-based and backward-looking Taylor rules: a "global" analysis," Staff Reports 198, Federal Reserve Bank of New York.
  6. Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1998. "Monetary Policy and Multiple Equilibria," Working Papers 98-02, C.V. Starr Center for Applied Economics, New York University.
  7. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  8. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13409, National Bureau of Economic Research, Inc.
  9. Hippolyte D'Albis & Emmanuelle Augeraud-Véron & Hermen Jan Hupkes, 2012. "Discontinuous Initial Value Problems for Funtional Differential-Algebraic Equations of Mixed Type," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00717412, HAL.
  10. d’Albis, Hippolyte & Augeraud-Véron, Emmanuelle & Hupkes, Hermen Jan, 2014. "Multiple solutions in systems of functional differential equations," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 50-56.
  11. Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
  12. Raouf Boucekkine & David de la Croix & Omar Licandro, . "Modelling vintage structures with DDEs: Principles and applications," Working Papers 2004-07, FEDEA.
  13. 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.
  14. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability," Proceedings, Federal Reserve Bank of Cleveland, pages 1379-1423.
  15. BOUCEKKINE, Raouf & FABBRI, Giorgio & PINTUS, Patrick, . "On the optimal control of a linear neutral differential equation arising in economics," CORE Discussion Papers RP 2449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Bennett T. McCallum, 1980. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
  17. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  18. Dupor, Bill, 2001. "Investment and Interest Rate Policy," Journal of Economic Theory, Elsevier, vol. 98(1), pages 85-113, May.
  19. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper 0009, Federal Reserve Bank of Cleveland.
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  21. Nicoletta Batini & Alejandro Justiniano & Paul Levine & Joseph Pearlman, 2004. "Robust Inflation-Forecast-Based Rules to Shield against Indeterminacy," School of Economics Discussion Papers 0804, School of Economics, University of Surrey.
  22. Carlstrom, Charles T. & Fuerst, Timothy S., 2005. "Investment and interest rate policy: a discrete time analysis," Journal of Economic Theory, Elsevier, vol. 123(1), pages 4-20, July.
  23. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  24. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  25. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
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  27. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2003. "Indeterminacy with inflation-forecast-cased rules in a two-bloc model," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  28. Nicoletta Batini & Joe Pearlman, 2002. "Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules," Computing in Economics and Finance 2002 182, Society for Computational Economics.
  29. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  30. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
  31. repec:hal:journl:halshs-00786419 is not listed on IDEAS
  32. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  33. Benhabib, Jess, 2004. "Interest Rate Policy in Continuous Time with Discrete Delays," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 1-15, February.
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