Taylor rules and equilibrium determinacy in a two-country model with non-traded goods

Fujisaki, Seiya (2012): Taylor rules and equilibrium determinacy in a two-country model with non-traded goods.

Abstract

We analyze a relation between interest rate controls and equilibrium determinacy using a two-country model featuring traded and non-traded goods. In addition, parameters of preference and production may differ between the two countries. We find that macroeconomic stability strongly depends on such heterogeneity including monetary policy, and that it is easier to generate determinate equilibrium under liberalization of the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: heterogeneity; Taylor rule; open economy; non-traded goods; equilibrium determinacy
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Airaudo, M., and Zanna, L.-F., 2004, Endogenous Fluctuations in Open Economies: The Perils of Taylor Rules Revisited, manuscript.

Airaudo, M., and Zanna, L.-F., 2012a, Equilibrium Determinacy and Inflation Measures for Interest Rate Rules, Review of Economic Dynamics, forthcoming.

Airaudo, M., and Zanna, L.-F., 2012b, Interest Rate Rules, Endogenous Cycles and Chaotic Dynamics in Open Economies, IMF Working Paper, 12/121.

Ball, L., 1998, Policy Rules For Open Economies, NBER Working Paper Series 6760.

Batini, N., Levine, P., and Pearlman, J., 2004, Indeterminacy with Inflation-Forecast-Based Rules in a Two-Bloc Model, Board of Governors of the Federal Reserve System, International Finance Discussion Papers 797.

Benigno, G., and Benigno, P., 2006, Designing targeting rules for international monetary policy cooperation, Journal of Monetary Economics 53, 473-506.

Bullard, J., and Schaling, E., 2009, Monetary Policy, Determinacy, and Learnability in a Two-Block World Economy, Journal of Money, Credit and Banking 41, No. 8, 1585-1612.

Carlstrom, C., T., and Fuerst, T., S., 1999, Optimal Monetary Policy in a Small Open Economy: A General Equilibrium Analysis, Federal Reserve of Cleveland Working Paper 9911.

Chang, J.-J., Chen, S.-H., Lai, C.-C., and Shaw, M.-F., 2008, Interest-rate rules and transitional dynamics in an endogenously growing open economy, Journal of International Money and Finance 27, 54-75.

Clarida, R., Gal'i, J., and Gertler, M., 2002, A simple framework for international monetary policy analysis, Journal of Monetary Economics 49, 879-904.

De Fiore, F., and Liu, Z., 2005, Does trade openness matter for aggregate instability?, Journal of Economic Dynamics and Control 29, No. 7, 1165-1192.

Farmer, R.E.A., and Lahiri, A., 2005, A Two-Country Model of Endogenous Growth, Review of Economic Dynamics 8, 68-88.

Fujisaki, S., 2012. Interest-Rate Control Rules and Stability in a Heterogeneous Two-Country Model, MPRA Paper No. 37017.

Fujisaki, S., Mino, K., 2007. Generalized Taylor Rule and Determinacy of Growth Equilibrium. Economics Bulletin 5, Issue 11, 1-7.

Kam, T., 2004, Two-sided Learning and Optimal Monetary Policy in an Open Economy Model, The University of Western Australia, Department of Economics in its series Economics Discussion/Working Papers, 04-07.

Kam, T., 2007, Interest-rate smoothing in a two-sector small open economy, Journal of Macroeconomics 29, 283-304.

McKnight, S., 2011a, Investment and Interest Rate Policy in the Open Economy, Oxford Economic Papers 63, No. 4, 673-699.

McKnight, S., 2011b, Real Indeterminacy and the Timing of Money in Open Economies, Serie documentos de trabajo del Centro de Estudios Econ'omicos, 2011-01.

McKnight, S., and Mihailov, A., 2007, Re-examining the Importance of Trade Openness for Aggregate Instability, EARG Working Paper No. 2007-012.

Ono, Y., 2006, International Asymmetry In Business Activity and Appreciation of a Stagnant Country's Currency, The Japanese Economic Review 57, No. 1, 101-120.

Taylor, J. B., 1993, Discretion versus Policy Rules in Practice, Carnegie-Rochester Conference Series on Public Policy 39, 195-214.

Valente, S., 2006. Trade, Envy and Growth: International Status Seeking in a Two-Country World, MPRA Paper No. 1095.

Valente, S., 2009. International Status Seeking, Trade, and Growth Leadership, Canadian Journal of Economics 42, No. 2, 554-589.

Zanna, L.-F., 2003, Interest Rate Rules and Multiple Equilibria in the Small Open Economy, Board of Governors of the Federal Reserve System, International Finance Discussion Papers 785.

Zanna, L.-F., 2004, PPP Rules, Macroeconomic (In)stability and Learning, Board of Governors of the Federal Reserve System, International Finance Discussion Papers 814.