Chaotic Dynamics in Optimal Monetary Policy

There is by now a large consensus in modern monetary policy. This consensus has been built upon a dynamic general equilibrium model of optimal monetary policy as developed by, e.g., Goodfriend and King (1997), Clarida et al. (1999), Svensson (1999) and Woodford (2003). In this paper we extend the standard optimal monetary policy model by introducing nonlinearity into the Phillips curve. Under the specific form of nonlinearity proposed in our paper (which allows for convexity and concavity and secures closed form solutions), we show that the introduction of a nonlinear Phillips curve into the structure of the standard model in a discrete time and deterministic framework produces radical changes to the major conclusions regarding stability and the efficiency of monetary policy. We emphasize the following main results: (i) instead of a unique fixed point we end up with multiple equilibria; (ii) instead of saddle--path stability, for different sets of parameter values we may have saddle stability, totally unstable equilibria and chaotic attractors; (iii) for certain degrees of convexity and/or concavity of the Phillips curve, where endogenous fluctuations arise, one is able to encounter various results that seem intuitively correct. Firstly, when the Central Bank pays attention essentially to inflation targeting, the inflation rate has a lower mean and is less volatile; secondly, when the degree of price stickiness is high, the inflation rate displays a larger mean and higher volatility (but this is sensitive to the values given to the parameters of the model); and thirdly, the higher the target value of the output gap chosen by the Central Bank, the higher is the inflation rate and its volatility.Comment: 11 page

Asymmetric Monetary Policy Rules For An Open Economy: Evidence From Canada and the UK

We present an analytical framework to examine the open economy monetary policy rule of a central bank under asymmetric preferences. The resulting policy rule is then empirically examined using quarterly data with regard to Canada and the UK from 1983q1 to 2007q4. Our empirical investigation shows that the open economy policy rule receives support from the data and that the monetary policy makers in the UK and Canada have asymmetric preferences. Robustness checks based on model calibration provide support for the suggested policy rule

Benzodiazepines for Psychosis-Induced Aggression or Agitation

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Inflation dynamics in the US - a nonlinear perspective

A stylized fact of US inflation dynamics is one of extreme persistence and possible unit root behavior. If so, the implications for macroeconomics and monetary policy are somewhat unpalatable. Our econometric analysis proposes a parsimonious representation of the inflation process, the nonlinear ESTAR, rather than the IMA process with time-varying parameters as in Stock and Watson (2007). The empirical results confirm a number of the key features such as regime changes and implicit Federal Reserve inflation targets. We address the issue of whether the source of the Great Moderation can be ascribed to good luck rather than good policy