Monetary policy rules: An approach based on the theory of chaos control

Graciela Chaparro Guevara,Lorenzo Escot

doi:10.1016/j.rico.2021.100038

Abstract

This article explores the relationship between Taylor rules for monetary policy and those derived from chaos control methods. A similar structure of both rule types would theoretically support the stabilizing role of the Taylor rule for the control of inflation, which until now has been based on an empirical framework. This link between monetary policy and chaos control rules is illustrated using the OGY method of chaos control, resulting in a control rule that is applied to a monetary model that presents chaotic solutions and becomes stable at an objective equilibrium point with a stable inflation rate.

Highlights

Monetary policy rules are used by central banks to conduct monetary policy within a strategy that sets the objectives to be achieved in terms of inflation, unemployment, or economic growth
We propose that the power as stabilizers of the economy of these political rules arises precisely from their relationship and foundation in chaos control theory
We have shown how this type of monetary rule is linked to the control theory of chaotic dynamic systems

Summary

Introduction

Monetary policy rules are used by central banks to conduct monetary policy within a strategy that sets the objectives to be achieved in terms of inflation, unemployment, or economic growth. The economic authorities use rules as a guide for driving their policy instruments according to the evolution of the deviation of the objective variables from their targets or desired levels. The rules provide a clear specification of the actions that central banks must follow in order to achieve their macroeconomic objectives, thereby reducing the uncertainty caused by the discretionary actions of the economic authorities and ensuring a greater certainty for economic agents as to the conduct of monetary policy. The Taylor rule has acquired a normative significance for the establishment of interest rates and has been adopted as a reference by an increasing number of monetary authorities. The rule lacks a precise theoretical foundation since it was developed empirically from the follow-up to the evolution of the US federal funds rate between 1984 and 1992 [2]

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