Interest Rate Policy in Continuous Time with Discrete Delays

Jess Benhabib

    Research output: Contribution to journalArticle

    Abstract

    We study the design of monetary policy in a continuous-time framework with delays. More explicitly, we consider a linear, flexible-price model where inflation and nominal interest rates change continuously, but where nominal rates are set by the Central Bank in response to a lagged inflation measure, and where the measure of inflation can be constructed as a flexible distributed delay. Therefore, the Central Bank has, in addition to the choice of an "active" or "passive" response to inflation, two additional parameters to select: the lag of the inflation measure, and the coefficient for the distributed delay to construct the inflation measure. The pure continuous-time and discrete-time frameworks emerge as special cases of our differential-delay system. This richer framework also allows us to reconcile results on the local uniqueness and multiplicity of equilibria that are obtained in the two pure cases, to uncover special assumptions embedded in the pure cases, and to prescribe effective policy options to avoid the problem of local indeterminacy and its unintended consequences.

    Original languageEnglish (US)
    Pages (from-to)1-15
    Number of pages15
    JournalJournal of Money, Credit and Banking
    Volume36
    Issue number1
    StatePublished - Feb 2004

    Fingerprint

    Interest rate policy
    Continuous time
    Inflation
    Central bank
    Distributed delay
    Coefficients
    Discrete-time
    Multiplicity
    Lag
    Unintended consequences
    Policy options
    Nominal interest rate
    Monetary policy
    Uniqueness
    Local indeterminacy

    Keywords

    • Delay
    • Indeterminacy
    • Taylor rules

    ASJC Scopus subject areas

    • Finance
    • Accounting
    • Economics and Econometrics

    Cite this

    Interest Rate Policy in Continuous Time with Discrete Delays. / Benhabib, Jess.

    In: Journal of Money, Credit and Banking, Vol. 36, No. 1, 02.2004, p. 1-15.

    Research output: Contribution to journalArticle

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