Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies

Author/Editor:

Luis-Felipe Zanna ; Marco Airaudo

Publication Date:

May 1, 2012

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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

Please address any questions about this title to publications@imf.org