Backward- versus Forward-Looking Feedback Interest Rate Rules

Hippolyte d'Albis, Emmanuelle Augeraud-Véron and Hermen Jan Hupkes ()
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Hermen Jan Hupkes: Mizzou - University of Missouri [Columbia] - University of Missouri System

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Abstract: This paper proposes conditions for the existence and uniqueness of solutions to systems of differential equations with delays or advances in which some variables are non-predetermined. An application to the issue of optimal interest rate policy is then develop in a flexible-price model where money enters the utility function. Central banks have the choice between a rule that depends on past inflation rates or one that depends on predicted interest rates. When inflation rates are selected over a bounded time interval, the problem is characterized by a system of delay or advanced differential equations. We then prove that if the central bank's forecast horizon is not too long, an active and forward-looking monetary policy is not too destabilizing : the equilibrium trajectory is unique and monotonic.

Keywords: Interest rate rules; indeterminacy; functionnal differential equations; Règles de taux d'intérêt; indétermination; équations différentielles fonctionnelles (search for similar items in EconPapers)
Date: 2012-06
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00721289v1
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Published in 2012

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Working Paper: Backward- versus Forward-Looking Feedback Interest Rate Rules (2012)
Working Paper: Backward- versus Forward-Looking Feedback Interest Rate Rules (2012)
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