Interest rate rules, endogenous cycles, and chaotic dynamics in open economies

Marco Airaudo () and Luis-Felipe Zanna

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 10, 1566-1584

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 and endogenous fluctuations (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies (2010)
Working Paper: Interest rate rules, endogenous cycles, and chaotic dynamics in open economies (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:10:p:1566-1584

DOI: 10.1016/j.jedc.2012.06.003

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