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Structural Stability of the Generalized Taylor Rule

William Barnett () and Evgeniya Duzhak
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Evgeniya Duzhak: Zicklin School of Business, Baruch College, City University of New York

No 201404, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coe- cients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the existence of a period doubling bifurca- tion. As a result, a small change in the parameters (e.g. a more active policy response) can lead to a drastic change in the path of in ation. We demonstrate that while the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations, a hybrid rule exhibits the same pattern of period doubling bifurcations as the basic setup.

Keywords: New Keynesian; Taylor Rule; regime switching; bifurcation analysis; structural stability. (search for similar items in EconPapers)
JEL-codes: C14 C22 E37 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ore
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Working Paper: Structural Stability of the Generalized Taylor Rule (2014) Downloads
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