TY  - JOUR
AU  - Benhabib,Jess
AU  - Schmitt-Grohe,Stephanie
AU  - Uribe,Martin
TI  - Chaotic Interest Rate Rules: Expanded Version
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10272
PY  - 2004
Y2  - February 2004
UR  - http://www.nber.org/papers/w10272
L1  - http://www.nber.org/papers/w10272.pdf
N1  - Author contact info:
Jess Benhabib
Department of Economics
New York University
19 West 4th Street, 6th Floor
New York, NY 10012
Tel: 212/998-8971
Fax: 212/995-4186
E-Mail: jess.benhabib@nyu.edu

Stephanie Schmitt-Grohe
Department of Economics
Columbia University
New York, NY 10027
Tel: 212/854-8059
Fax: 212/854-4010
E-Mail: stephanie.schmittgrohe@columbia.edu

Martin Uribe
Department of Economics
Columbia University
International Affairs Building
New York, NY 10027
Tel: 212 851 4008
Fax: 212 854 8059
E-Mail: martin.uribe@columbia.edu
AB  - A growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of Taylor-type interest rate feedback rules. That is, rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target. This paper shows that such rules can easily lead to chaotic dynamics. The result is obtained for feedback rules that depend on contemporaneous or expected future inflation. The existence of chaotic dynamics is established analytically and numerically in the context of calibrated economies. The battery of fiscal policies that has recently been advocated for avoiding global indeterminacy induced by Taylor-type interest-rate rules (such as liquidity traps) are shown to be unlikely to provide a remedy for the complex dynamics characterized in this paper.
ER  -