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Nonlinear monetary policy rules in a pure exchange overlapping generations model

Author

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  • Anna Agliari

    (Catholic University)

  • Ahmad Naimzada

    (University of Milano - Bicocca)

  • Nicolò Pecora

    (Catholic University)

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.

Suggested Citation

  • Anna Agliari & Ahmad Naimzada & Nicolò Pecora, 2017. "Nonlinear monetary policy rules in a pure exchange overlapping generations model," Journal of Evolutionary Economics, Springer, vol. 27(5), pages 1181-1203, November.
    • Handle: RePEc:spr:joevec:v:27:y:2017:i:5:d:10.1007_s00191-017-0522-8
    DOI: 10.1007/s00191-017-0522-8
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    More about this item

    Keywords

    OLG model; Nonlinear dynamics; Monetary policy; Stability; Global bifurcations;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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