Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Interest rate rules, endogenous cycles, and chaotic dynamics in open economies
Marco Airaudo
Luis-Felipe Zanna
Abstract

In this paper we present an extensive analysis of the consequences for global equilibrium determinacy of implementing active interest rate rules (i.e. monetary rules where the nominal interest rate responds more than proportionally to changes in inflation) in flexible-price open economies. We show that conditions under which these rules generate aggregate instability by inducing cyclical and chaotic equilibrium dynamics depend on particular characteristics of open economies such as the degree of (trade) openness and the degree of exchange rate pass-through implied by the presence of non-traded distribution costs. For instance, we find that a forward-looking rule is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through. The existence of these dynamics and their dependence on the degree of openness are in general robust to different timings of the rule (forward-looking versus contemporaneous rules), to the use of alternative measures of inflation in the rule (CPI versus Core inflation), as well as to changes in the timing of real money balances in liquidity services ("cash-when-I-am-done" timing versus "cash-in-advance" timing).


Download Full text
Download Full text
Cite this item
Marco Airaudo & Luis-Felipe Zanna, Interest rate rules, endogenous cycles, and chaotic dynamics in open economies, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 849, 2005.
More from this series
JEL Classification:
Subject headings:
Keywords: Interest rates ; Equilibrium (Economics)
For corrections, contact Ryan Wolfslayer ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal