Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies
42 Pages Posted: 9 Aug 2012
Date Written: May 2012
Abstract
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.
Keywords: Small Open Economy, Interest Rate Rules, Taylor Rules, Multiple Equilibria, Chaos, Cycles And Endogenous Fluctuations, Economic Models, Interest Rates, Real Effective Exchange Rates
JEL Classification: E32, E52, F41
Suggested Citation: Suggested Citation
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