Consider a classical economy with an exogenous real interest rate process {rt}. Discuss the conditions under which the equilibrium will be (locally) unique and solve for the equilib- rium level of inflation when the central bank follows the rules: (a) Rule #1: Partial adjustment i₁ = $¡it−1 + (1 − $;)ii where ; € [0,1] and it is a reference interest rate given by, ϋ =ρ+Φαπε (b) Rule #2: Moving average inflation targeting
Consider a classical economy with an exogenous real interest rate process {rt}. Discuss the conditions under which the equilibrium will be (locally) unique and solve for the equilib- rium level of inflation when the central bank follows the rules: (a) Rule #1: Partial adjustment i₁ = $¡it−1 + (1 − $;)ii where ; € [0,1] and it is a reference interest rate given by, ϋ =ρ+Φαπε (b) Rule #2: Moving average inflation targeting
Chapter1: Making Economics Decisions
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![Equilibrium indeterminacy and interest rate rules
Consider a classical economy with an exogenous real interest rate process {rt}. Discuss the
conditions under which the equilibrium will be (locally) unique and solve for the equilib-
rium level of inflation when the central bank follows the rules:
(a) Rule #1: Partial adjustment
i = pit-1+ (1 – 4:)i:
where o e [0,1] and i; is a reference interest rate given by,
(b) Rule #2: Moving average inflation targeting
it = p+ Prīt
where 7 = (1– 8) Lo oK Tq-k-
(c) Show the equivalence between the two rules.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe95b3f8d-9bae-4fbb-aebb-e848d06675aa%2Fc94d2426-a999-4f12-ba8d-dd22d19f8754%2Fpo0w5iq_processed.png&w=3840&q=75)
Transcribed Image Text:Equilibrium indeterminacy and interest rate rules
Consider a classical economy with an exogenous real interest rate process {rt}. Discuss the
conditions under which the equilibrium will be (locally) unique and solve for the equilib-
rium level of inflation when the central bank follows the rules:
(a) Rule #1: Partial adjustment
i = pit-1+ (1 – 4:)i:
where o e [0,1] and i; is a reference interest rate given by,
(b) Rule #2: Moving average inflation targeting
it = p+ Prīt
where 7 = (1– 8) Lo oK Tq-k-
(c) Show the equivalence between the two rules.
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