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Interest rate rules and equilibrium (in)determinacy in a small open economy: the role of internationally traded capital

Author

Listed:
  • Chang Wen-ya
  • Tsai Hsueh-fang

    (Fu-Jen Catholic University, Taipei, Taiwan)

  • Chang Juin-jen

    (Institute of Economics, Academia Sinica, Nankang, Taipei 11529, Taiwan, R.O.C., Fax: +886-2-27853946)

  • Lin Hsieh-yu

    (Academia Sinica, Taipei, Taiwan)

Abstract

This study develops a small-open-economy version of Benhabib, J., S. Schmitt-Grohé, and M. Uribe. 2001. “Monetary Policy and Multiple Equilibria.” American Economic Review 91: 167–186. We systematically explore the role of international capital mobility and the portfolio balance channel in terms of macroeconomic (in)stability when the government follows a commonly-adopted interest-rate feedback rule. In a one-traded-good model, the steady-state equilibrium, in general, is locally determinate; international capital mobility stabilizes the economy against business cycle fluctuations under a simple interest-rate feedback rule. In a two-good (traded and non-traded goods) model, the relationship between equilibrium (in)determinacy and the aggressiveness of interest rate rules is not monotonic, and crucially depends on households’ portfolio preferences. These results suggest that a unified interest rate rule can end up with very different consequences of macroeconomic (in)stability in an open economy from those in a closed economy.

Suggested Citation

  • Chang Wen-ya & Tsai Hsueh-fang & Chang Juin-jen & Lin Hsieh-yu, 2018. "Interest rate rules and equilibrium (in)determinacy in a small open economy: the role of internationally traded capital," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(2), pages 1-18, June.
    • Handle: RePEc:bpj:bejmac:v:18:y:2018:i:2:p:18:n:2
    DOI: 10.1515/bejm-2016-0128
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    More about this item

    Keywords

    indeterminacy; interest rate rules; international capital mobility; portfolio preference;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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