Niveau: Supérieur, Doctorat, Bac+8
Endogenous Fluctuations in Open Economies: The Perils of Taylor Rules Revisited ? Marco Airaudo† Luis-Felipe Zanna‡ This Draft: February 2004 Abstract Can active Taylor rules (i.e. monetary rules where the nominal interest rate responds more than proportionally to inflation) deliver global equilibrium uniqueness in small open economies? By studying the local and global dynamics of a standard small open economy we point out the misleading results and policy advices that one would derive from a standard local analysis. We show that rules that guarantee a local unique equilibrium may actually lead the economy into liquidty traps, cycles and chaos. More importantly we find that there is an interesting interaction between the relative risk aversion coe?cient and the degree of openness that determines the nature of the global dynamics of the aforementioned economy. In particular, given the relative risk aversion coe?cient, we show that the more open the economy is, the more likely is that a contemporaneous rule will drive the economy into a liquidity trap. On the other hand, the more closed the economy is, the more likely is that the same rule will lead to cycles and chaotic dynamics around the inflation target. In contrast for forward-looking rules we find that given the relative risk aversion coe?cient, it is more likely that these rules will lead the economy into cycles and chaos, the higher the degree of openness of the economy is.
- open economy
- standard local
- taylor rules
- economies has
- interest rate
- fluctuations without
- active interest
- small open economies