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Interest rate rules and macroeconomic stabilization

Published online by Cambridge University Press:  17 August 2016

Mark Weder*
Affiliation:
School of Economics, The University of Adelaide, Humboldt- Universität zu Berlin,CDMA and CEPR
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Summary

High degrees of relative risk aversion induce indeterminacy in cash-in-advance economies. This paper finds that Taylor-style policies can preempt such sunspot equilibria. Specific policy recommendations depend on the fundamentals of the economy, i.e. the empirically true value of coefficient of relative risk aversion.

Résumé:

Résumé:

Un haut degré d'aversion au risque induit de l'indétermination dans une économie où une règle de cash-in-advance est intégrée. Cet article montre que des politiques « à la Taylor » peuvent éviter de tels équilibres de taches solaires. Les recommandations spécifiques de politique économiques dépendent des fondamentaux de l'économie, c'est-à-dire de la valeur empirique du coefficient d'aversion relative au risque.

Type
Research Article
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2006 

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Footnotes

*

This paper was written while I was a DFG Heisenberg Fellow. I would like to thank the Federal Reserve Bank of San Francisco for its hospitality as well as Chuck Carlstrom and one anonymous referee for helpful comments.

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