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Macroeconomic (in)stability under real interest rate targeting

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Author Info

  • Chin, Chi-Ting
  • Guo, Jang-Ting
  • Lai, Ching-Chong

Abstract

We show that in a one-sector monetary endogenous growth model under real interest rate targeting, the local stability properties of the economy's balanced growth path depend crucially on the exact formulation of the cash-in-advance constraint and the degree of productive externalities. In particular, when a positive fraction (including 100%) of gross investment is subject to the liquidity constraint, the model exhibits indeterminacy and sunspots if and only if the equilibrium wage-hours locus is positively sloped and steeper than the labor supply curve. On the other hand, when real money balances are required only for the household's consumption purchases, the economy always displays saddle-path stability and equilibrium uniqueness, regardless of the strength of productive externalities.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 9 (September)
Pages: 1631-1638

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:9:p:1631-1638

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Real interest rate targeting Endogenous growth Cash-in-advance constraint Indeterminacy;

References

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  1. Eric V. Clifton, 1990. "Real Interest Rate Targeting," IMF Working Papers 90/111, International Monetary Fund.
  2. Yip, C.K. & Wang, P., 1989. "Alternative Approaches To Money And Growth," Papers 8-89-4, Pennsylvania State - Department of Economics.
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  16. Carlos A. Vegh, 2001. "Monetary Policy, Interest Rate Rules, and Inflation Targeting: Some Basic Equivalences," NBER Working Papers 8684, National Bureau of Economic Research, Inc.
  17. Lai, Ching-chong & Chen, Shu-hua & Shaw, Ming-fu, 2005. "Nominal income targeting versus money growth targeting in an endogenously growing economy," Economics Letters, Elsevier, vol. 86(3), pages 359-366, March.
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Cited by:
  1. Theodore Palivos & Nikos Tsakiris, 2009. "Trade and Tax Reforms in a Cash-in-Advance Economy," University of Cyprus Working Papers in Economics 1-2009, University of Cyprus Department of Economics.

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