IDEAS home Printed from https://ideas.repec.org/p/rut/rutres/200109.html
   My bibliography  Save this paper

Chaotic Interest Rate Rules

Author

Listed:
  • Jess Benhabib

    () (New York University)

  • Stephanie Schmitt-Grohe

    () (Rutgers University)

  • Martin Uribe

    () (University of Pennsylvania)

Abstract

A growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of Taylor-type interest rate feedback rules. That is, rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target. This paper shows that such rules can easily lead to chaotic dynamics. The result is obtained for feedback rules that depend on contemporaneous or expected future inflation. The existence of chaotic dynamics is established analytically and numerically in the context of calibrated economies. The battery of fiscal policies that have recently been advocated for avoiding global indeterminacy induced by Taylor-type interest-rate rules (such as liquidity traps) are shown to be unlikely to provide a remedy for the complex dynamics characterized in this paper.

Suggested Citation

  • Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Chaotic Interest Rate Rules," Departmental Working Papers 200109, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:200109
    as

    Download full text from publisher

    File URL: http://www.sas.rutgers.edu/virtual/snde/wp/2001-09.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January.
    2. Carlstrom, Charles T. & Fuerst, Timothy S., 2004. "Learning and the central bank," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 327-338, March.
    3. Stephanie Schmitt-Grohé & Martín Uribe, 2009. "Liquidity traps with global Taylor Rules," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 85-106.
    4. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters,in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
    5. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Timing and real indeterminacy in monetary models," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 285-298, April.
    6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    7. Stephanie Schmitt-Grohe & Jess Benhabib & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March.
    8. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
    9. Evans, George W. & Honkapohja, Seppo, 2003. "Existence of adaptively stable sunspot equilibria near an indeterminate steady state," Journal of Economic Theory, Elsevier, vol. 111(1), pages 125-134, July.
    10. 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.
    11. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    12. anonymous, 1980. "What’s wrong with macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum.
    13. 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.
    14. 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.
    15. Richard H. Clarida & Mark Gertler, 1997. "How the Bundesbank Conducts Monetary Policy," NBER Chapters,in: Reducing Inflation: Motivation and Strategy, pages 363-412 National Bureau of Economic Research, Inc.
    16. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper 0009, Federal Reserve Bank of Cleveland.
    17. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    18. James N. Duprey, 1980. "The search for a stable money demand equation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum.
    19. Schmitt-Grohe, Stephanie & Uribe, Martin, 2000. "Price level determinacy and monetary policy under a balanced-budget requirement," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 211-246, February.
    20. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 83-103, February.
    21. Honkapohja, Seppo & Mitra, Kaushik, 2004. "Are non-fundamental equilibria learnable in models of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1743-1770, November.
    22. Dupor, Bill, 2001. "Investment and Interest Rate Policy," Journal of Economic Theory, Elsevier, vol. 98(1), pages 85-113, May.
    23. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    24. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    25. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-1385, September.
    26. 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.
    27. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-533, December.
    28. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Benhabib, Jess & Eusepi, Stefano, 2005. "The design of monetary and fiscal policy: A global perspective," Journal of Economic Theory, Elsevier, vol. 123(1), pages 40-73, July.
    2. 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.
    3. Stephanie Schmitt-Grohé & Martín Uribe, 2009. "Liquidity traps with global Taylor Rules," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 85-106.
    4. Piazza, Roberto, 2016. "Self-fulfilling deflations," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 18-40.
    5. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Two Reasons Why Money and Credit May be Useful in Monetary Policy," NBER Working Papers 13502, National Bureau of Economic Research, Inc.
    6. Stefano Eusepi, 2005. "Comparing forecast-based and backward-looking Taylor rules: a "global" analysis," Staff Reports 198, Federal Reserve Bank of New York.
    7. Duarte, Fernando M., 2016. "How to escape a liquidity trap with interest rate rules," Staff Reports 776, Federal Reserve Bank of New York, revised 01 Dec 2016.
    8. Kyrtsou, Catherine & Vorlow, Costas, 2009. "Modelling non-linear comovements between time series," Journal of Macroeconomics, Elsevier, vol. 31(1), pages 200-211, March.
    9. Stephen McKnight & Alexander Mihailov, 2015. "Do Real Balance Effects Invalidate the Taylor Principle in Closed and Open Economies?," Economica, London School of Economics and Political Science, vol. 82(328), pages 938-975, October.
    10. Marco Airaudo & Luis-Felipe Zanna, 2004. "Endogenous Fluctuations in Open Economies: the Perils of Taylor Rules Revisited," Econometric Society 2004 Latin American Meetings 80, Econometric Society.
    11. Gilles Dufrénot & Anwar Khayat, 2014. "Monetary Policy Switching in the Euro Area and Multiple Equilibria: An Empirical Investigation," Working Papers halshs-00973504, HAL.
    12. 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.
    13. Eusepi, Stefano, 2007. "Learnability and monetary policy: A global perspective," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1115-1131, May.
    14. Airaudo, Marco & Zanna, Luis-Felipe, 2012. "Interest rate rules, endogenous cycles, and chaotic dynamics in open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1566-1584.
    15. Meixing DAI, 2009. "On the role of money growth targeting under inflation targeting regime," Working Papers of BETA 2009-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    16. Orlando Gomes, 2004. "A Continuous-Time Asset Pricing Model with Boundedly Rational Heterogeneous Agents," Finance 0409055, University Library of Munich, Germany.
    17. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, vol. 14(2), pages 129-147.
    18. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    19. Chang, Wen-ya & Tsai, Hsueh-fang & Chang, Juin-jen, 2011. "Interest rate rules and macroeconomic stability with transaction costs," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 744-749, October.
    20. Tim Hursey & Alexander Wolman & Andreas Hornstein, 2014. "Monetary Policy and Global Equilibria in an Economy with Capital," 2014 Meeting Papers 733, Society for Economic Dynamics.
    21. repec:spr:joecth:v:64:y:2017:i:1:d:10.1007_s00199-016-0969-0 is not listed on IDEAS
    22. Waters, George A., 2007. "Regime changes, learning and monetary policy," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 255-282, June.
    23. Orlando Gomes, 2004. "Optimal Monetary Policy under Heterogeneous Expectations," Macroeconomics 0409023, University Library of Munich, Germany.
    24. Stefano Eusepi, 2005. "Central bank transparency under model uncertainty," Staff Reports 199, Federal Reserve Bank of New York.

    More about this item

    Keywords

    chaos; periodic equilibria; Taylor rules ;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rut:rutres:200109. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/derutus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.