Please use this identifier to cite or link to this item:
Benhabib, Jess
Schmitt-Grohe, Stephanie
Uribe, Martin
Year of Publication: 
Series/Report no.: 
Working Paper 1998-31
Since John Taylor's (1993) seminal paper, a large literature has argued that active interest rate feedback rules, that is, rules that respond to increases in inflation with a more than one-for-one increase in the nominal interest rate, are stabilizing. In this paper, we argue that once the zero bound on nominal interest rates is taken into account, active interest-rate feedback rules can easily lead to unexpected consequences. Specifically, in the context of a sticky-price model, we show that even if the steady state at which monetary policy is active is locally the unique equilibrium, typically there exists an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge either to another steady state at which monetary policy is passive or to a stable limit cycle around the active steady state. We conclude that the use of local techniques for monetary policy evaluation might lead to spurious policy recommendations.
Interest rate feedback rules
liquidity traps
multiple equilibria
zero bound on nominal rates
Document Type: 
Working Paper
Social Media Mentions:

Files in This Item:
1.17 MB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.