scholarly journals INTEREST RATE RULES AND MACROECONOMIC STABILITY UNDER HETEROGENEOUS EXPECTATIONS

2012 ◽  
Vol 17 (8) ◽  
pp. 1574-1604 ◽  
Author(s):  
Mikhail Anufriev ◽  
Tiziana Assenza ◽  
Cars Hommes ◽  
Domenico Massaro
Keyword(s):  
Interest Rate ◽  
Rational Expectations ◽  
Multiple Equilibria ◽  
Monetary Authority ◽  
Past Performance ◽  
Inflation Dynamics ◽  
Interest Rate Rules ◽  
Heterogeneous Expectations ◽  
Dynamic Stochastic ◽  
The Interest Rate

The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation of monetary policy. We use a simple frictionless dynamic stochastic general equilibrium (DSGE) model to investigate inflation dynamics under alternative interest rate rules when agents have heterogeneous expectations, and update their beliefs based on past performance, as in Brock and Hommes [Econometrica65(5), 1059–1095 (1997)]. The stabilizing effect of different monetary policies depends on the ecology of forecasting rules (i.e., the composition of the set of predictors), on agents' sensitivity to differences in forecasting performance, and on how aggressively the monetary authority sets the nominal interest rate in response to inflation. In particular, if the monetary authority responds only weakly to inflation, a cumulative process with rising inflation is likely. On the other hand, a Taylor interest rate rule that sets the interest rate more than point for point in response to inflation stabilizes inflation dynamics, but does not always lead the system to converge to the rational expectations equilibrium, as multiple equilibria may persist.

scholarly journals Self-Fulfilling Currency Crises: The Role of Interest Rates

2006 ◽  
Vol 96 (5) ◽  
pp. 1769-1787 ◽  
Author(s):  
Christian Hellwig ◽  
Arijit Mukherji ◽  
Aleh Tsyvinski
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Rational Expectations ◽  
Currency Crises ◽  
Multiple Equilibria ◽  
Asset Market ◽  
Equilibrium Uniqueness ◽  
Private Signals ◽  
Special Cases

We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises.

Understanding the Influence of Interest Rate Liberalization on Economic Structure and Monetary Policy

2015 ◽  
Vol 19 (4) ◽  
pp. 500-507
Author(s):  
Xiaowen Hu ◽  
◽  
Bing Xu ◽  
Shangfeng Zhang ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Economic Restructuring ◽  
Economic Structure ◽  
Bayes Estimation ◽  
External Shocks ◽  
Consumption Ratio ◽  
Interest Rate Liberalization ◽  
Dynamic Stochastic ◽  
The Interest Rate

In this paper, a dynamic stochastic general equilibrium model with price stickiness is constructed to analyze quantitatively the effect of interest rate liberalization on economic structure and monetary policy. Using parameter calibration and Bayes estimation, we analyze the impulse responses and numerical simulation of the external shocks of technology shocks and monetary policy shock. The empirical results find the following conclusion: Firstly, the interest rate liberalization is conducive to economic restructuring as the investment ratio and capital growth is suppressed and the household and government consumption ratio is promoted. Secondly, the interest rate liberalization can lower economic fluctuation, and enhance the defense ability against external shocks such as technological shocks and monetary policy shocks. Moreover, the interest rate liberalization is help to dredge the monetary policy transmission channels as the interest rate shocks on the real economy is gradually increased.

INTEREST RATE RULES AND EQUILIBRIUM STABILITY UNDER DEEP HABITS

2013 ◽  
Vol 18 (1) ◽  
pp. 23-40 ◽  
Author(s):  
Sarah Zubairy
Keyword(s):  
Interest Rate ◽  
Multiple Equilibria ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Interest Rate Rules ◽  
Keynesian Model ◽  
Interest Rate Rule ◽  
Countercyclical Markups ◽  
High Degree ◽  
Very High

This paper studies the determinacy of equilibrium in a new Keynesian model with deep habits under different interest rate rules. The main finding is that an interest rate rule satisfying the Taylor principle is no longer a sufficient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly enlarges the regions of determinacy. However, under all the simple interest rate rules considered, determinacy is not guaranteed for a very high degree of deep habits. Deep habits give rise to countercyclical markups, which is in line with empirical evidence and makes them an appealing feature in the study of demand shocks. The countercyclicality of markups also leads to multiple equilibria because of self-fulfilling expectations for a high degree of deep habit formation.

scholarly journals Metas de inflação e consistência expectacional em um modelo com regra de juros não linear

2019 ◽  
Vol 4 (2) ◽  
pp. 177
Author(s):  
Carlos Eduardo Iwai Drumond ◽  
Cleiton Silva De Jesus ◽  
João Basilio Pereima
Keyword(s):  
Interest Rate ◽  
Capacity Utilization ◽  
Monetary Authority ◽  
Policy Framework ◽  
Economic Cycle ◽  
Inflation Target ◽  
Inflation Rates ◽  
Interest Rate Rule ◽  
The Interest Rate

<p>The aim of this paper is to develop a post-Keynesian macroeconomic model that takes into account a non-linearity in the interest rate rule. We assume that the monetary authority considers, in the practice of monetary policy, an interaction between inflation rates and the rate of capacity utilization, so that the sensitivity of the interest rate rule to the gap of inflation in relation to target varies according to the economic cycle. The macroeconomic policy framework proposed here allows the monetary authority to be sensitive to the inflation and to the output without, losing sight of the anchoring role of the inflation target.</p>

Interest Rate Liberalization and Fiscal Policy in China: A New Keynesian DSGE Model

2014 ◽  
Vol 18 (6) ◽  
pp. 985-991
Author(s):  
Bing Xu ◽  
◽  
Qiuqin He ◽  
Xiaowen Hu ◽  
Shangfeng Zhang ◽  
...  
Keyword(s):  
Fiscal Policy ◽  
Interest Rate ◽  
New Keynesian ◽  
Crowding Out ◽  
Dsge Model ◽  
Interest Rate Liberalization ◽  
Policy Shocks ◽  
Dynamic Stochastic ◽  
The Interest Rate ◽  
Positive Effect

By building a new Keynesian dynamic stochastic general equilibrium (DSGE) model, we analyze the effect of interest rate liberalization on fiscal policy. First, we find that when the interest rate increases, technology shocks, monetary policy shocks, and fiscal policy shocks can effectively stabilize economic fluctuations. Second, when the interest rate rises, fiscal policy enhances the positive effect on output first, with decreasing the negative effect on output later. Third, fiscal policy increases the original crowding-out effect on consumption and investment. However, this increase in the crowding-out effect does not restrain the positive effect of fiscal policy on output, which benefits from interest rate liberalization.

Interest Rate Controls: The United States in the 1940s

1992 ◽  
Vol 52 (3) ◽  
pp. 631-650 ◽  
Author(s):  
Mark Toma
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Rational Expectations ◽  
The United States ◽  
Treasury Bills ◽  
Government Bonds ◽  
Market Rate ◽  
Long Run ◽  
The Interest Rate

In 1942 the U.S. Treasury and the Federal Reserve agreed to keep the interest rate on long-term government bonds below a ceiling of 2.5 percent. Assuming rational expectations, the ceiling on long-term interest rates can be viewed as a government commitment to low long-run inflation. The Fed also agreed to buy and sell short-term government bonds at a below-market rate of 3/8 percent. This policy did not result in long-run inflation because it was narrowly confined to 3-month Treasury bills.

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