Bubble-free policy feedback rules (Q2271369)

This paper provides an insight into the design of policy feedback rules in linear dynamic stochastic rational-expectations models and interest-rate rules in locally linearizable rational-expectations models of the monetary transmission mechanism. The authors design rules ensuring that the model admits not only a unique stationary solution, but also no non-stationary solutions. Effectively, these rules turn the saddle into a necklace while they are able to select any given candidate stationary VARMA solution. Furthermore, the authors apply these results to locally linearizable models of the monetary transmission mechanism and obtain interest-rate rules that not only ensure the local determinacy of the targeted equilibrium in the neighborhood of the steady state considered, but also prevent the economy from gradually leaving this neighborhood. The limitations of the interest-rate and bubble-free policy feedback rules are also discussed in the paper. Reviewer's remark: The paper is well-written and of interest to experts in both rational-expectations models and policy feedback rules as well as interest-rate rules.