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Worldwide macroeconomic stability and monetary policy rules

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Author Info
Bullard, James
Singh, Aarti

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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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File URL: http://www.sciencedirect.com/science/article/B6VBW-4T708DF-2/2/6694646915e4249b0f59c702925498aa
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Publisher 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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  3. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Evans , George W & Honkapohja, Seppo, 2007. "Expectations, learning and monetary policy: an overview of recent research," Research Discussion Papers 32/2007, Bank of Finland. [Downloadable!]
    Other versions:
  2. Luis Gonzalo Llosa & Vicente Tuesta, 2006. "Determinacy and Learnability of Monetary Policy Rules in Small Open Economies," RES Working Papers 4479, Inter-American Development Bank, Research Department. [Downloadable!]
    Other versions:
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