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: Department of Mathematics - University of Missouri - Columbia, https://www.math.missouri.edu/
Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne
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 (search for similar items in EconPapers)
JEL-codes: E52 E21 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
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Working Paper: Backward- versus Forward-Looking Feedback Interest Rate Rules (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:12051
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