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Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies
Author:
Luis-Felipe Zanna
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Mr. Marco Airaudo null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 121
Language:
English
Publication Date:
01 May 2012
DOI:
https://doi.org/10.5089/9781475503500.001
ISBN:
9781475503500
ISSN:
1018-5941
Pages:
40
Keywords:
WP; interest rate; Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Cycles and Endogenous Fluctuations; liquidity trap; exchange rate pass-through; closed economy; interest rate rule; money balance; marginal utility; Inflation; Exchange rate pass-through; Consumption; Real exchange rates; Import prices; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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 inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on specific characteristics of open economies. In particular, rules that respond to expected future inflation are more prone to induce endogenous cyclical and chaotic dynamics the more open the economy to trade.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund