Comments on backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability

Charles Carlstrom and Timothy Fuerst

No 319, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: Benhabib, Schmitt-Grohe, and Uribe (2003) argue that if you relied solely on local analysis you would be led to believe that aggressive, backward-looking interest rate rules are sufficient for determinacy. But from the perspective of global analysis, backward-looking rules do not guarantee uniqueness of equilibrium and indeed may lead to cyclic and even chaotic equilibria. This comment argues that this result is premature. We utilize a discrete time model and make two observations. First, compared to their continuous time model, the cyclic equilibria under a backward-looking rule are much less likely to arise in a discrete time model. Second, pure backward-looking rules are less likely to suffer from these global indeterminacy problems than rules that also include current or future inflation.

Keywords: Interest rates; Monetary policy (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-200319 Persistent link
https://www.clevelandfed.org/-/media/project/cleve ... -on-backward-pdf.pdf Full text (application/pdf)

Related works:
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:fip:fedcwp:0319

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-200319

Access Statistics for this paper

More papers in Working Papers (Old Series) from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().