Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies
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Summary:
We present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on specific characteristics of open economies. In particular, rules that respond to expected future inflation are more prone to induce endogenous cyclical and chaotic dynamics the more open the economy to trade.
Series:
Working Paper No. 2012/121
Subject:
Consumption Exchange rate pass-through Foreign exchange Import prices Inflation National accounts Prices Real exchange rates
Frequency:
Annually
English
Publication Date:
May 1, 2012
ISBN/ISSN:
9781475503500/1018-5941
Stock No:
WPIEA2012121
Pages:
40
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