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STRUCTURAL STABILITY OF THE GENERALIZED TAYLOR RULE

  • William A. Barnett (a1) and Evgeniya A. Duzhak (a2)
Abstract

This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coefficients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the possibility of a period-doubling bifurcation. As a result, a small change in the parameters (e.g., a more active policy response) can lead to a drastic change in the path of inflation. We show that the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations. A New Keynesian model with a hybrid rule, however, exhibits the same pattern of period-doubling bifurcations as the analysis with a simple monetary rule.

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Corresponding author
Address correspondence to: Evgeniya A. Duzhak, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105, USA; e-mail: evgeniya.duzhak@sf.frb.org.
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The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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