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

Marco Airaudo () and Luis-Felipe Zanna

No 171, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: In this paper 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 changes in inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on particular characteristics of open economies, including the degree of trade openness and the degree of exchange rate pass-through into import prices. For instance, in our model, we find that a rule that responds to expected future inflation is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through.

Keywords: Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Endogenous Fluctuations (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Related works:
Journal Article: Interest rate rules, endogenous cycles, and chaotic dynamics in open economies (2012)
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:cca:wpaper:171

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