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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

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 (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
Date: 2012-06
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ftp://mse.univ-paris1.fr/pub/mse/CES2012/12051.pdf (application/pdf)

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Working Paper: Backward- versus Forward-Looking Feedback Interest Rate Rules (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:12051

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