Interest rate rules and macroeconomic stability with transaction costs

Wen-ya Chang, Hsueh-fang Tsai and Juin-jen Chang

International Review of Economics & Finance, 2011, vol. 20, issue 4, 744-749

Abstract: This paper analyzes the relationship between interest-rate feedback rules and macroeconomic stability in the presence of transaction costs. We show that with the Sims-type (1994) transaction-cost technology, a passive, rather than an active, interest-rate rule is more likely to generate a stabilizing effect against belief-driven fluctuations if both the intertemporal elasticity of substitution with respect to consumption and the sensitivity of the transaction costs with respect to the velocity of money are low. This result is valid under either an unbounded or a bounded transaction-cost technology. Of importance, our result is relevant under empirically plausible parameters, while it sharply contrasts with Taylor's (1993) prediction.

Keywords: Interest-rate; feedback; rules; Macroeconomic; stability; Transaction; costs (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:20:y:2011:i:4:p:744-749

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