Hopf Bifurcation from New-Keynesian Taylor Rule to Ramsey Optimal Policy
Post-Print: Macroeconomic Dynamics, 17th January 2020, Pages 1-33. Doi.org/10.1017/S1365100519001032
33 Pages Posted: 19 May 2017 Last revised: 16 Feb 2020
Date Written: January 17, 2020
This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory.
Keywords: Bifurcations, Taylor rule, Taylor principle, new-Keynesian model, Ramsey optimal policy
JEL Classification: C61, C62, E43, E44, E47, E52, E58
Suggested Citation: Suggested Citation