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Chaotic Interest Rate Rules

21 Pages Posted: 19 Aug 2001  

Jess Benhabib

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

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

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

Date Written: 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.

Keywords: Taylor rules, chaos, periodic equilibria

JEL Classification: E52, E31, E63

Suggested Citation

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

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Stephanie Schmitt-Grohe

Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

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Martin Uribe (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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212-851-4008 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

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United States

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