Equilibrium Indeterminacy under Forward-Looking Interest Rate Rules

This paper develops a general equilibrium model with a banking system and a reserves market and shows that (i) the macroeconomic stabilizing properties of the nominal interest rate rules change quite substantially when we move from a model without a banking system to one with a banking system and a reserves market; (ii) the interplay between fiscal and monetary policies, in particular inflation-indexed versus non-indexed bonds, is crucial in determining the macroeconomic stabilizing properties of monetary rules; (iii) active rules and passive rules perform equally in regard to their macroeconomic stabilizing properties; (iv) continuous- and discrete-time specifications deliver the same/different (in)determinacy results for both the labor-only model and the endogenous-capital model under forward-looking/current-looking rules; (v) the inclusion of physical investment narrows the indeterminacy region under forward-looking rules; and (vi) current-looking rules make equilibrium determinacy impossible for both the labor-only economy and the endogenous-capital economy. Economic intuitions are provided.

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Capital and macroeconomic instability in a discrete-time model with forward-looking interest rate rules

Journal of Economic Dynamics and Control ◽

10.1016/j.jedc.2006.09.010 ◽

2007 ◽

Vol 31 (8) ◽

pp. 2802-2826 ◽

Cited By ~ 15

Author(s):

Kevin X.D. Huang ◽

Qinglai Meng

Keyword(s):

Interest Rate ◽

Discrete Time ◽

Time Model ◽

Interest Rate Rules ◽

Discrete Time Model ◽

Macroeconomic Instability ◽

Forward Looking

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News Shocks and Optimal Simple Rules

Review of Economics ◽

10.1515/roe-2011-0102 ◽

2011 ◽

Vol 62 (1) ◽

pp. 1-11 ◽

Cited By ~ 3

Author(s):

Roland C. Winkler ◽

Hans-Werner Wohltmann

Keyword(s):

Interest Rate ◽

Basic Principle ◽

News Shocks ◽

Interest Rate Rules ◽

Policy Rules ◽

Control Rule ◽

Simple Rules ◽

Forward Looking

SummaryThis paper evaluates the performance of optimal simple policy rules in the presence of news shocks. It is shown that the inclusion of forward-looking elements enhances the performance of simple optimized interest rate rules when agents learn about future disturbances in advance. We provide a rationale for this result by demonstrating that, if shocks are news shocks, the optimal unrestricted control rule under commitment contains as a basic principle a forward-looking element.

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