Open AccessEquilibrium Indeterminacy under Forward-Looking Interest Rate Rules
Author(s) -
Ryuichi Nakagawa
Publication year - 2009
Publication title -
ssrn electronic journal
Language(s) - English
Resource type - Journals
ISSN - 1556-5068
DOI - 10.2139/ssrn.1549541
Subject(s) - indeterminacy (philosophy) , economics , interest rate , mathematical economics , econometrics , financial economics , keynesian economics , law and economics , monetary economics , epistemology , philosophy
Why is the rational expectations equilibrium locally indeterminate if the central bank raises the nominal interest rate too actively in response to a rise in expected inflation? This is because although the bank succeeds in stabilizing the expectations of the future economy, it allows the current economy to arbitrarily fluctuate. This indeterminacy expands in dimension as the forecast horizon of the rule becomes long.
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