Abstract
We build a macroeconomic model that allows for non-linearity in the interest rate rule. We assume that to determine the rate of interest, the monetary authority considers the interaction between the actual inflation and the capacity utilization, so that the sensitivity of the interest rule to the inflation gap varies in accordance with the business cycle. The macroeconomic policy framework we propose enables the monetary authority to give as much weight to inflation as to the product without losing sight of the expected anchor role of the inflation target, for a closed economy as well as for an open economy.
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Notes
Setterfield (2007, p. 129) defines income policies as either “formal and/or informal institutions that frame and mediate aggregate wage and price-setting behavior in such a way as to reduce conflict over income shares and better reconcile conflicting income claims.” It is in this sense that the idea of income policies has been considered in the present article.
We can demonstrate a similar result from the minimization of the quadratic loss function \(L={\beta }_1{\left( \pi -{\pi }^{\rm T}\right) }^2+{\beta }_2{\left( y-y^n\right) }^2\) where \(\left( y-y^n\right)\) is the output gap and \(\beta _1\) and \(\beta _2\)are positive parameters. For the Phillips curve \(\pi = \pi ^e+\alpha \left( y-y^n\right)\) we have the following first-order condition: \(\alpha \beta _1\left( \pi - \pi ^{\rm T}\right) =\beta _2\left( y^n-y\right)\). When we consider the natural output as an attractor to the output that necessarily works in the absence of frictions, there is no expectational inconsistency. This is the new-Keynesian traditional view about the output trend. Otherwise, we have a similar kind of expectational inconsistency in the absence of this assumption, as suggested previously.
For a technical discussion of the Hopf bifurcation theorem, see Guckenheimer and Holmes (1997)
On this point, see Asada and Semmler (1995)
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We gratefully acknowledge two referees and an associate editor for their helpful comments and suggestions. This study was financed in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior—Brasil (CAPES)—Finance Code 001.
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Drumond, C.E.I., de Jesus, C.S., Pereima, J.B. et al. Alternative monetary policy rules and expectational consistency. Evolut Inst Econ Rev 19, 319–341 (2022). https://doi.org/10.1007/s40844-021-00208-2
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DOI: https://doi.org/10.1007/s40844-021-00208-2