Hopf Bifurcation from new-Keynesian Taylor rule to Ramsey Optimal Policy

Document pages: 30 pages

Abstract: This paper compares different implementations of monetary policy in anew-Keynesian setting. We can show that a shift from Ramsey optimal policyunder short-term commitment (based on a negative feedback mechanism) to aTaylor rule (based on a positive feedback mechanism) corresponds to a Hopfbifurcation with opposite policy advice and a change of the dynamic properties.This bifurcation occurs because of the ad hoc assumption that interest rate isa forward-looking variable when policy targets (inflation and output gap) areforward-looking variables in the new-Keynesian theory.