Taylor Rules and Macroeconomic Instability or How the Central Bank Can Preempt Sunspot Expectations

Taylor Rules and Macroeconomic Instability or How the Central Bank Can Pre-empt Sunspot Expectations

This paper derives new results on the e¤ects of employing Taylor rules in economies that are subject to real market imperfections such as production externalities. Taylor rules that aggressively respond to output can eliminate sunspot equilibria that arise from the increasing returns. The paper also ...nds that rules which should be chosen (avoided) in perfect market environments often yield (e...

Central Bank Balance Sheet Concerns, Monetary and Fiscal Rules, and Macroeconomic Stability∗

We provide a fully articulated theoretical foundation for the view that a central bank’s (CB) balance sheet concerns may hinder monetary policy “activism” needed to achieve macroeconomic stability. When the Taylor rule is constrained by the zero lower bound on the nominal interest rate, there emerges a second steady state equilibrium which has the properties of a liquidity trap. CB’s balance sh...

Central Bank and the Macroeconomic Environment in Nigeria

Interest Rate Rules and Macroeconomic Stability under Heterogeneous Expectations

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 Bro...

Central Bank Credibility Under Inferential Expectations

The theory of inferential expectations states that “economic agents hold beliefs that are subject to falsification by new information, in much the same way that they are in conventional statistical hypothesis testing.” We outline the role expectations play in current monetary economic theory by ∗Corresponding author. Contact details: Crawford School of Economics and Government, Australian Natio...