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:

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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. 12/121

Subject:

Frequency:

Annually

English

Publication Date:

May 1, 2012

ISBN/ISSN:

9781475503500/1018-5941

Stock No:

WPIEA2012121

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

40

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