Nonlinear monetary policy rules in a pure exchange overlapping generations model

Anna Agliari, Nicolo' Pecora, Ahmad Naimzada

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

The dynamics of a pure exchange overlapping generations model with endogenous money growth rule is investigated. We consider a nonlinear monetary policy rule which, in each period, bounds the money growth rate so that money is determined by the deviation of the inflation rate from its target. More precisely, we introduce such a mechanism through a sigmoidal money adjustment mechanism characterized by the presence of two asymptotes that bound the money variation, and thus the dynamics. It is shown that, depending on the timing of the monetary policy and the degree of reaction of the Central Bank, the target equilibrium may be destabilized via different types of bifurcations. Multistability and coexistence of attractors may also occur and the study of the basins of attraction allows us to analyze the global dynamic properties of the economy under scrutiny. We find that active monetary policy rules may be relevant for their stabilizing properties, but they also may open the door to equilibrium cycles of any periodicity and even chaos.
Original languageEnglish
Pages (from-to)1181-1203
Number of pages23
JournalJournal of Evolutionary Economics
Volume27
DOIs
Publication statusPublished - 2017

Keywords

  • Global bifurcations
  • Monetary policy
  • Nonlinear dynamics
  • OLG model
  • Stability

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