Equilibrium indeterminacy and interest rate rules Question 2.3 in Galí (2015) Consider a classical economy with an exogenous real interest rate process {r}. 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 it = Q¡it-1 + (1 - i)ii where = [0,1] and it is a reference interest rate given by, i=p+Pxπt (b) Rule #2: Moving average inflation targeting it = p + prπt where 7+ = (1-8) ²007 πt-k (c) Show the equivalence between the two rules.

Equilibrium indeterminacy and interest rate rules Question 2.3 in Galí (2015) Consider a classical economy with an exogenous real interest rate process {r}. 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 it = Q¡it-1 + (1 - i)ii where = [0,1] and it is a reference interest rate given by, i=p+Pxπt (b) Rule #2: Moving average inflation targeting it = p + prπt where 7+ = (1-8) ²007 πt-k (c) Show the equivalence between the two rules.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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