Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-11-29T07:20:33.419Z Has data issue: false hasContentIssue false
  • English
  • Français

MONETARY FEEDBACK RULES AND EQUILIBRIUM DETERMINACY IN PURE EXCHANGE OVERLAPPING GENERATIONS MODELS

Published online by Cambridge University Press:  21 June 2017

Ahmad Naimzada ,
Nicolò Pecora  and
Alessandro Spelta
Ahmad Naimzada
Affiliation:
University of Milano - Bicocca
Nicolò Pecora*
Affiliation:
Catholic University
Alessandro Spelta
Affiliation:
University of Pavia
*
Address correspondence to: Nicolò Pecora, Department of Economics and Social Science, Catholic University, Via Emilia\Parmense 84, 29100, Piacenza, Italy; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper considers a pure exchange overlapping generations model in which the money-growth rate is endogenous and follows a feedback rule. Different specifications for the monetary policy rule are analyzed, namely a so-called current, forward, or backward-looking feedback rule, depending on whether the monetary authority uses the actual, expected, or last observed values of the inflation rate to set the monetary policy. We study how the responsiveness of the policy rule with respect to inflation affects the determinacy of the monetary equilibrium. A policy rule is called aggressive (moderate) if it responds strongly (moderately) to inflation deviations from the target. We show how aggressive feedback rules, depending on the considered timing, can reinforce mechanisms that lead to indeterminacy or may lead the inflation rate to fluctuate around the monetary equilibrium at which monetary policy is aggressive. A leaning against the wind policy seems to be more desirable from an equilibrium determinacy point of view. On the contrary, a leaning with the wind policy could not be the recommended policy for the Central Bank.

Keywords

OLG ModelMonetary Policy RulesPerfect Foresight EquilibriumIndeterminacy
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 1 , January 2019 , pp. 29 - 51
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank two anonymous referees for valuable comments and remarks. The usual caveats apply.

References

REFERENCES

Benhabib, J., Schmitt-Grohé, S. and Uribe, M. (2001a) Monetary policy and multiple equilibria. American Economic Review 91 (1), 167–186.Google Scholar
Benhabib, J., Schmitt-Grohé, S. and Uribe, M. (2001b) The perils of Taylor rules. Journal of Economic Theory 96 (1), 40–69.Google Scholar
Benhabib, J., Schmitt-Grohé, S. and Uribe, M. (2002) Chaotic interest-rate rules. American Economic Review 92 (2), 72–78.Google Scholar
Benhabib, J., Schmitt-Grohé, S. and Uribe, M. (2003) Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability. Journal of Money, Credit & Banking 35 (6), 1379–1412.Google Scholar
Bernanke, B. S. and Woodford, M. (1997) Inflation Forecasts and Monetary Policy. NBER working paper 6157, National Bureau of Economic Research.Google Scholar
Bischi, G. I. and Marimon, R. (2001) Global stability of inflation target policies with adaptive agents. Macroeconomic Dynamics 5 (2), 148–179.Google Scholar
Bullard, J. (1994) Learning equilibria. Journal of Economic Theory 64 (2), 468–485.Google Scholar
Bullard, J. (2012) Inflation Targeting in the USA. Union League Club of Chicago, Breakfast@65West, Chicago, III. Federal Reserve Bank of St. Louis.Google Scholar
Carlstrom, C. T. and Fuerst, T. S. (2000) Forward-Looking Versus Backward-Looking Taylor Rules. NBER working paper 00-09, Federal Reserve Bank of Cleveland.Google Scholar
Carlstrom, C. T. and Fuerst, T. S. (2003) Money growth rules and price level determinacy. Review of Economic Dynamics 6 (2), 263–275.Google Scholar
Clarida, R. H. and Gertler, M. (1997) How the Bundesbank conducts monetary policy. In Romer, C. D. and Romer, D. H. (eds.), Reducing Inflation: Motivation and Strategy, pp. 363–412. Chicago: University of Chicago Press.Google Scholar
Creel, J. and Hubert, P. (2015) Has inflation targeting changed the conduct of monetary policy? Macroeconomic Dynamics 19 (1), 1–21.Google Scholar
Debreu, G. (1974) Excess-demand functions. Journal of Mathematical Economics 1, 15–21.Google Scholar
Guckenheimer, J. and Holmes, P. (2013) Nonlinear Oscillations, Dynamical Systems, and Bifurcations of Vector Fields, vol. 42. Springer Science & Business Media.Google Scholar
Heemeijer, P., Hommes, C., Sonnemans, J. and Tuinstra, J. (2012) An experimental study on expectations and learning in overlapping generations models. Studies in Nonlinear Dynamics & Econometrics 16 (4), 1–47.Google Scholar
Li, T. Y. and Yorke, J. A. (1975) Period three implies chaos. American Mathematical Monthly 82 (10), 985–992.Google Scholar
Mantel, R. (1974) On the characterization of aggregate excess-demand. Journal of Economic Theory 7, 348–353.Google Scholar
Marcet, A. and Sargent, T. J. (1989a) Convergence of least squares learning mechanisms in self-referential linear stochastic models. Journal of Economic theory 48 (2), 337–368.Google Scholar
Marcet, A. and Sargent, T. J. (1989b) Least-squares learning and the dynamics of hyperinflation. In Barnett, W., Geweke, J. and Shell, K. (eds.), 4th International Symposia in Economic Theory and Econometrics, pp. 119–137. Cambridge, UK: Cambridge University Press.Google Scholar
Marcet, A. and Nicolini, J. P. (2003) Recurrent hyperinflations and learning. American Economic Review 93 (5), 1476–1498.Google Scholar
Marimon, R. and Sunder, S. (1993) Indeterminacy of equilibria in a hyperinflationary world: Experimental evidence. Econometrica: Journal of the Econometric Society 61 (5), 1073–1107.Google Scholar
Marimon, R. and Sunder, S. (1995) Does a constant money-growth rule help stabilize inflation? Experimental evidence. Carnegie-Rochester Conference Series on Public Policy 43, 111–156.Google Scholar
Matsuyama, K. (1990) Sunspot equilibria (rational bubbles) in a model of money-in-the-utility-function. Journal of Monetary Economics 25 (1), 137–144.Google Scholar
Matsuyama, K. (1991) Endogenous price fluctuations in an optimizing model of a monetary economy. Econometrica: Journal of the Econometric Society 59 (6), 1617–1631.Google Scholar
Mira, C., Gardini, L., Barugola, A. and Cathala, J. C. (1998) Chaotic Dynamics in Two-Dimensional Noninvertible Maps. Singapore: World Scientific.Google Scholar
Obstfeld, M. and Rogoff, K. (1984) Exchange rate dynamics with sluggish prices under alternative price-adjustment rules. International Economic Review 25 (1), 159–174.Google Scholar
Obstfeld, M. and Rogoff, K. (1986) Ruling out divergent speculative bubbles. Journal of Monetary Economics 17 (3), 349–362.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2000) Price level determinacy and monetary policy under a balanced-budget requirement. Journal of Monetary Economics 45 (1), 211–246.Google Scholar
Schönhofer, M. (2001) Can agents learn their way out of chaos? Journal of Economic Behavior & Organization 44 (1), 71–83.Google Scholar
Sharkovsky, A. N. (1995) Coexistence of cycles of a continuous map of the line into itself. International Journal of Bifurcation and Chaos 5 (5), 1263–1273.Google Scholar
Sonnenschein, H. (1973) Do Walras' identity and continuity characterize the class of community excess demand functions? Journal of Economic Theory 6 (4), 345–354.Google Scholar
Taylor, J. B. (ed.) (2007) Monetary Policy Rules. Chicago: University of Chicago Press.Google Scholar
Tuinstra, J. (2003) Beliefs equilibria in an overlapping generations model. Journal of Economic Behavior & Organization 50 (2), 145–164.Google Scholar
Tuinstra, J. and Wagener, F. O. (2007) On learning equilibria. Economic Theory 30 (3), 493–513.Google Scholar
Von Hagen, J. (1999) Money growth targeting by the Bundesbank. Journal of Monetary Economics 43 (3), 681–701.Google Scholar
Walsh, C. E. (2009) Inflation targeting: What have we learned? International Finance 12 (2), 195–233.Google Scholar
Woodford, M. (1994) Monetary policy and price level determinacy in a cash-in-advance economy. Economic Theory 4 (3), 345–380.Google Scholar