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

Author/Editor: Luis-Felipe Zanna | Marco Airaudo
Authorized for Distribution: May 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,972KB)
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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.
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Series: Working Paper No. 12/121
Frequency: Annually
Subject(s): Economic models | Interest rates | Real effective exchange rates
Author's keyword(s): Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Cycles and Endogenous Fluctuations.
    Published:   May 1, 2012        
    ISBN/ISSN:   9781475503500/1018-5941   Format:   Paper
    Stock No:   WPIEA2012121   Pages:   40
    Price:   US$18.00
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