Nonlinear Inflation Expectations and Endogenous Fluctuations

Orlando Gomes

Czech Economic Review, 2010, vol. 4, issue 3, 263-280

Abstract: The standard new Keynesian monetary policy problem is presentable as a set of linearized equations, for values of endogenous variables relatively close to their steady-state. As a result, only three possibilities are admissible in terms of long-term dynamics: the equilibrium may be a stable node, an unstable node or a saddle point. Fixed point stability (a stable node) is generally guaranteed for an active monetary policy rule. The benchmark model also considers extremely simple assumptions about expectations (perfect foresight is frequently assumed). In this paper, one inquires how a change in the way inflation expectations are modelled implies a change in monetary policy results, when an active Taylor rule is considered. By assuming that inflation expectations are constrained by the evolution of the output gap, we radically modify the implications of policy intervention: endogenous cycles, of various periodicities, and chaotic motion will be observable for reasonable parameter values.

Keywords: Monetary policy; Taylor rule; inflation expectations; endogenous business cycles; nonlinear dynamics and chaos (search for similar items in EconPapers)
JEL-codes: C61 E32 E52 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://auco.cuni.cz/mag/article/download/id/93/type/attachment (application/pdf)

Related works:
Working Paper: Nonlinear inflation expectations and endogenous fluctuations (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fau:aucocz:au2010_263

Ordering information: This journal article can be ordered from
http://auco.cuni.cz/

Access Statistics for this article

More articles in Czech Economic Review from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies Contact information at EDIRC.
Bibliographic data for series maintained by Lenka Stastna ().