[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/fip/fedrwp/90-01.html
   My bibliography  Save this paper

Interest rate rules and nominal determinacy

Author

Listed:
  • John H. Boyd
  • Michael Dotsey
Abstract
Monetary economists have recently begun a serious study of money supply rules that allow the Fed to adjustably peg the nominal interest rate under rational expectations. These rules vary from procedures that produce stationary nominal magnitudes to those that generate nonstationarities in nominal variables. Our paper investigates the determinacy properties of three representative interest rate rules. ; We use Blanchard and Kahn's solution technique as a starting point. It doesn't directly apply, so we first modify their procedure. We then narrow the range of solutions by considering the ARMA solutions of Evans and Honkapohja and the global minimum state variable solution of McCallum. We then examine these solutions in light of the expectational stability notions employed by DeCanio, Bray and Evans. ; Two of the three classes of rules yield a unique admissible solution. The exclusion of bubbles usually rules out the general ARMA solutions present in Evans and Honkapohja and leads to unique solutions via a saddlepoint property. Nonetheless, the nonstationary money supply rules we examine do not generally yield a well determined system over all parameter values. We employ the global minimum state variable methodology of McCallum and Evans' expectational stability in an effort to insure uniqueness. Although these methods are usually in agreement, one of the nonstationary rules yields a global minimum state variable solution that is expectationally unstable when the central bank is sensitive to interest rate deviations. Moreover, under these conditions, an alternative (non-global) minimum state variable solution is expectationally stable, casting doubt on the applicability of McCallum's global procedure in this context.

Suggested Citation

  • John H. Boyd & Michael Dotsey, 1990. "Interest rate rules and nominal determinacy," Working Paper 90-01, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:90-01
    as

    Download full text from publisher

    File URL: http://www.richmondfed.org/publications/research/working_papers/1990/wp_90-1.cfm
    Download Restriction: no
    File URL: https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/working_papers/1990/pdf/wp90-1.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
    2. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    3. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
    4. McCallum, Bennett T., 1986. "Some issues concerning interest rate pegging, price level determinacy, and the real bills doctrine," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 135-160, January.
    5. Evans, George W., 1986. "Selection criteria for models with non-uniqueness," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 147-157, September.
    6. Matthew B. Canzoneri & Dale W. Henderson & Kenneth S. Rogoff, 1983. "The Information Content of the Interest Rate and Optimal Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(4), pages 545-566.
    7. Dotsey, Michael & King, Robert G., 1983. "Monetary instruments and policy rules in a rational expectations environment," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 357-382, September.
    8. Gourieroux, C & Laffont, J J & Monfort, Alain, 1982. "Rational Expectations in Dynamic Linear Models: Analysis of the Solutions," Econometrica, Econometric Society, vol. 50(2), pages 409-425, March.
    9. Stephen J. DeCanio, 1979. "Rational Expectations and Learning from Experience," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(1), pages 47-57.
    10. Goodfriend, Marvin, 1987. "Interest rate smoothing and price level trend-stationarity," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 335-348, May.
    11. George Evans & Seppo Honkapohja, 1986. "A Complete Characterization of ARMA Solutions to Linear Rational Expectations Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 227-239.
    12. Blume, L. E. & Bray, M. M. & Easley, D., 1982. "Introduction to the stability of rational expectations equilibrium," Journal of Economic Theory, Elsevier, vol. 26(2), pages 313-317, April.
    13. George Evans, 1985. "Expectational Stability and the Multiple Equilibria Problem in Linear Rational Expectations Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1217-1233.
    14. Frydman, Roman & Phelps, Edmund S., 1983. "Individual Expectations and Aggregate Outcomes: An Introduction to the Problem," Working Papers 83-02, C.V. Starr Center for Applied Economics, New York University.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frank Hespeler, 2008. "Solution Algorithm to a Class of Monetary Rational Equilibrium Macromodels with Optimal Monetary Policy Design," Computational Economics, Springer;Society for Computational Economics, vol. 31(3), pages 207-223, April.
    2. Michael Dotsey & Christopher Otrok, 1994. "M2 and monetary policy: a critical review of the recent debate," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 41-49.
    3. Onatski, Alexei, 2006. "Winding number criterion for existence and uniqueness of equilibrium in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 323-345, February.
    4. James B. Bullard, 1991. "Learning, rational expectations and policy: a summary of recent research," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 50-60.
    5. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
    6. Michael Dotsey & Andreas Hornstein, 2011. "On the implementation of Markov-perfect monetary policy," Working Papers 11-29, Federal Reserve Bank of Philadelphia.
    7. Hetzel, Robert L., 1995. "Why the price level wanders aimlessly," Journal of Economics and Business, Elsevier, vol. 47(2), pages 151-163, May.
    8. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
    9. Michael Dotsey, 1996. "Some not-so-unpleasant monetarist arithmetic," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 73-91.
    10. Michael Dotsey & Andreas Hornstein, 2008. "On the implementation of Markov-perfect interest rate and money supply rules: global and local uniqueness," Working Papers 08-30, Federal Reserve Bank of Philadelphia.
    11. Shibayama, Katsuyuki, 2011. "A Solution Method For Linear Rational Expectation Models Under Imperfect Information," Macroeconomic Dynamics, Cambridge University Press, vol. 15(4), pages 465-494, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530, Elsevier.
    2. Joseph E. Gagnon & Dale W. Henderson, 1990. "Nominal interest rate pegging under alternative expectations hypotheses," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 438-473.
    3. McCallum, Bennett T., 2003. "Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1153-1175, July.
    4. McCallum, Bennett T., 2007. "E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1376-1391, April.
    5. McCallum, Bennett T., 2001. "Indeterminacy, bubbles, and the fiscal theory of price level determination," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 19-30, February.
    6. Heinemann, Maik, 1997. "Convergence of Adaptive Learning and the Concept of Expectational Stability in Linear Rational Expectations Models with Multiple Equilibria," Hannover Economic Papers (HEP) dp-207, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    7. Gourieroux, C. & Jasiak, J. & Monfort, A., 2020. "Stationary bubble equilibria in rational expectation models," Journal of Econometrics, Elsevier, vol. 218(2), pages 714-735.
    8. Hetzel, Robert L., 1998. "U.S. monetary policy and monetary policy and the ESCB," ZEI Working Papers B 09-1998, University of Bonn, ZEI - Center for European Integration Studies.
    9. Robert L. Hetzel, 1988. "The monetary responsibilities of a central bank," Economic Review, Federal Reserve Bank of Richmond, vol. 74(Sep), pages 19-31.
    10. Olivier Loisel, 2004. "Monetary policy rules to preclude booms and busts," Money Macro and Finance (MMF) Research Group Conference 2003 56, Money Macro and Finance Research Group.
    11. Ariane Szafarz, 2015. "Market Efficiency and Crises:Don’t Throw the Baby out with the Bathwater," Bankers, Markets & Investors, ESKA Publishing, issue 139, pages 20-26, November-.
    12. Pablo García S. & Rodrigo Valdés P, 2003. "Dinero e Inflación en el Marco de Metas de Inflación," Working Papers Central Bank of Chile 198, Central Bank of Chile.
    13. Francesco Carravetta & Marco Sorge, 2010. "A “Nearly Ideal” Solution to Linear Time-Varying Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 35(4), pages 331-353, April.
    14. Adrian Penalver & Daniele Siena, 2021. "The Deflationary Bias of the ZLB and the FED’s Strategic Response," Working papers 843, Banque de France.
    15. Richard Dennis & Tatiana Kirsanova, 2010. "Expectations traps and coordination failures: selecting among multiple discretionary equilibria," Working Paper Series 2010-02, Federal Reserve Bank of San Francisco.
    16. Broze, Laurence & Gourieroux Christian & Szafarz A, 1986. "Reduction and identification of simultaneous equations models with rational expectations," CEPREMAP Working Papers (Couverture Orange) 8601, CEPREMAP.
    17. McCallum, Bennett T., 2004. "On the relationship between determinate and MSV solutions in linear RE models," Economics Letters, Elsevier, vol. 84(1), pages 55-60, July.
    18. Stephen J. Turnovsky, 2011. "Stabilization Theory and Policy: 50 Years after the Phillips Curve," Economica, London School of Economics and Political Science, vol. 78(309), pages 67-88, January.
    19. Evans, George W. & McGough, Bruce, 2005. "Stable sunspot solutions in models with predetermined variables," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 601-625, April.
    20. Michael Dotsey, 1991. "Open Market Operations in Australia: A US Perspective," The Economic Record, The Economic Society of Australia, vol. 67(3), pages 243-256, September.

    More about this item

    Keywords

    Interest rates;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedrwp:90-01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Pascasio (email available below). General contact details of provider: https://edirc.repec.org/data/frbrius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.