Abstract

http://ssrn.com/abstract=280088
 
 

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Chaotic Interest Rate Rules


Jess Benhabib


New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Stephanie Schmitt-Grohe


Duke University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martin Uribe


Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

August 15, 2001


Abstract:     
A growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of Taylor-type interest rate feedback rules. That is, rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target. This paper shows that such rules can easily lead to chaotic dynamics. The result is obtained for feedback rules that depend on contemporaneous or expected future inflation. The existence of chaotic dynamics is established analytically and numerically in the context of calibrated economies. The battery of fiscal policies that has recently been advocated for avoiding global indeterminacy induced by Taylor-type interest-rate rules (such as liquidity traps) are shown to be unlikely to provide a remedy for the complex dynamics characterized in this paper.

Number of Pages in PDF File: 21

Keywords: Taylor rules, chaos, periodic equilibria

JEL Classification: E52, E31, E63

working papers series


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Date posted: August 19, 2001  

Suggested Citation

Benhabib, Jess and Schmitt-Grohe, Stephanie and Uribe, Martin, Chaotic Interest Rate Rules (August 15, 2001). Available at SSRN: http://ssrn.com/abstract=280088 or http://dx.doi.org/10.2139/ssrn.280088

Contact Information

Jess Benhabib
New York University - Leonard N. Stern School of Business - Department of Economics ( email )
269 Mercer Street
7th Floor
New York, NY 10003
United States
212-998-8971 (Phone)
212-995-4186 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stephanie Schmitt-Grohe
Duke University - Department of Economics ( email )
Durham, NC 27708-0204
United States
919-660-1889 (Phone)
919-684-8974 (Fax)
HOME PAGE: http://www.econ.duke.edu/~grohe
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Martin Uribe (Contact Author)
Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )
420 W. 118th Street
1022 International Affairs Building, MC 3308
New York, NY 10027
United States
212-851-4008 (Phone)
212-854-8059 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  33
Citations:  11

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