Designing Monetary Policy : Backward - Looking Interest - Rate Rules ∗

When real balances have even a very small productive role, contemporaneous and forwardlooking Taylor-Wicksell rules can induce ubiquitous multiplicities of equilibria and lead to consequences that are unintended by policymakers. This raises the issue of whether it is possible to anchor and stabilize the economy through backward-looking rules. We show that the standard uniqueness results that are found in the literature for linearized models with backward-looking, active Taylor rules can be misleading. Analyzing the dynamics of such models without recourse to linearizations or to quadratic approximations, we show that robust multiplicities abound for realistic calibrations. In particular, such rules can give rise to endogenous equilibrium cycles along which the economy oscillates perpetually around the intended steady state equilibrium. The amplitude of these cycles is found to be economically significant. We conclude that further research must be undertaken to design stabilizing monetary policies. JEL Classification Numbers: E52, E31, E63.