IMF Working Papers

Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies

By Luis-Felipe Zanna, Marco Airaudo

May 1, 2012

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Luis-Felipe Zanna, and Marco Airaudo. Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies, (USA: International Monetary Fund, 2012) accessed November 21, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Consumption, Exchange rate pass-through, Foreign exchange, Import prices, Inflation, National accounts, Prices, Real exchange rates

Keywords: Chaos, Closed economy, Consumption, Cycles and Endogenous Fluctuations, Exchange rate pass-through, Exchange rate pass-through, Global, Import prices, Inflation, Interest rate, Interest rate rule, Interest Rate Rules, Liquidity trap, Marginal utility, Money balance, Multiple Equilibria, Real exchange rates, Small Open Economy, Taylor Rules, WP

Publication Details

  • Pages:

    40

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2012/121

  • Stock No:

    WPIEA2012121

  • ISBN:

    9781475503500

  • ISSN:

    1018-5941

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