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Worldwide macroeconomic stability and monetary policy rules

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  • Bullard, James
  • Singh, Aarti

Abstract

We study the interaction of multiple large economies in dynamic stochastic general equilibrium. Each economy has a monetary policymaker that attempts to control the economy through the use of a linear nominal interest rate feedback rule. The main results show how the determinacy of worldwide equilibrium depends on the joint behavior of policymakers worldwide. The results also show how indeterminacy exposes all economies to endogenous volatility, even ones where monetary policy may be judged appropriate from a closed economy perspective. Two quantitative cases are discussed. In the 1970s, worldwide equilibrium was characterized by a two-dimensional indeterminacy, despite US adherence to a version of the Taylor principle. In the last 15 years, worldwide equilibrium was still characterized by a one-dimensional indeterminacy, leaving all economies exposed to endogenous volatility. This analysis provides a rationale for a type of international policy coordination, and the gains to coordination in the sense of avoiding indeterminacy may be large.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): Supplement 1 (October)
Pages: S34-S47

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Handle: RePEc:eee:moneco:v:55:y:2008:i:s1:p:s34-s47

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Indeterminacy Sunspot equilibrium Taylor principle Great inflation;

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References

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Citations

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Cited by:
  1. Evans, George W & Honkapohja, Seppo, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Rersearch," CEPR Discussion Papers 6640, C.E.P.R. Discussion Papers.
  2. Luis Gonzalo Llosa & Vicente Tuesta, 2006. "Determinacy and Learnability of Monetary Policy Rules in Small Open Economies," Research Department Publications 4479, Inter-American Development Bank, Research Department.
  3. Jensen, Henrik, 2009. "Estimated Interest Rate Rules: Do they Determine Determinacy Properties?," CEPR Discussion Papers 7555, C.E.P.R. Discussion Papers.
  4. Enders, Walter & Ma, Jun, 2011. "Sources of the great moderation: A time-series analysis of GDP subsectors," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 67-79, January.
  5. Airaudo, Marco & Zanna, Luis-Felipe, 2012. "Interest rate rules, endogenous cycles, and chaotic dynamics in open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1566-1584.
  6. Luis-Felipe Zanna & Marco Airaudo, 2012. "Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies," IMF Working Papers 12/121, International Monetary Fund.
  7. Belaygorod, Anatoliy & Dueker, Michael, 2009. "Indeterminacy, change points and the price puzzle in an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 624-648, March.
  8. Enrique Martínez-García & Diego Vilán & Mark Wynne, 2012. "Bayesian estimation of NOEM models: identification and inference in small samples," Globalization and Monetary Policy Institute Working Paper 105, Federal Reserve Bank of Dallas.
  9. Jääskelä, Jarkko P. & Kulish, Mariano, 2010. "The butterfly effect of small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 34(7), pages 1295-1304, July.
  10. Airaudo, Marco, 2012. "Endogenous Dollarization, Sovereign Risk Premia and the Taylor Principle," School of Economics Working Paper Series 2012-11, LeBow College of Business, Drexel University.
  11. Blake, Andrew P & Markovic, Bojan, 2008. "The conduct of global monetary policy and domestic stability," Bank of England working papers 353, Bank of England.
  12. Hirose, Yasuo, 2010. "Monetary policy and sunspot fluctuation in the U.S. and the Euro area," MPRA Paper 33693, University Library of Munich, Germany.
  13. Anatoliy Belaygorod & Michael J. Dueker, 2007. "The price puzzle and indeterminacy in an estimated DSGE model," Working Papers 2006-025, Federal Reserve Bank of St. Louis.

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