Monetary policy, Taylor´s Rule and Endogenous Fluctuations
Luis Alberto Alonso González
Alfonso Palacio Vera
The paper analyses the dynamic behaviour of an economy when the central bank (CB) implements an inflation targeting regime. For this purpose, a simple macroeconomic model is constructed and subjected to formal dynamic analysis. A first result is that, under certain conditions, the emergence of endogenous oscillations in the economy is a possible scenario. A second implication is that CBs face two main policy dilemmas: (i) the degree of gradualism adopted when setting the level of short-term interest rates and (ii) the desirability or otherwise of raising interest rates as soon as economic indicators suggest the emergence of inflationary pressures.
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