Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79164
Authors: 
Benhabib, Jess
Schmitt-Grohé, Stephanie
Uribe, Martín
Year of Publication: 
2001
Series/Report no.: 
Working Papers, Department of Economics, Rutgers, The State University of New Jersey 2001,09
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 have 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.
Subjects: 
chaos
periodic equilibria
Taylor rules
JEL: 
E31
E52
E63
Document Type: 
Working Paper

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