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

Luis-Felipe Zanna and Marco Airaudo

No 2012/121, IMF Working Papers from International Monetary Fund

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: WP; interest rate; Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Cycles and Endogenous Fluctuations; liquidity trap; exchange rate pass-through; closed economy; interest rate rule; money balance; marginal utility; Inflation; Exchange rate pass-through; Consumption; Real exchange rates; Import prices; Global (search for similar items in EconPapers)
Pages: 40
Date: 2012-05-01
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Citations: View citations in EconPapers (16)

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