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Openness and interest rates: An analysis using the MIUF model and transaction cost model of money

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  • Takamatsu, Satoko
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    Abstract

    This paper discusses the manner in which the difference in the specification, which generates a demand for money by agents, alters the optimal interest rate in open economies by taking into account that the prices reflect the producers' optimization. In acanonical money-in-the-utility function (MIUF) model, the Friedman rule is optimal. On the other hand, in the transaction cost model, the optimal interest rate is positive and increases, in terms of the share of imports in consumption.

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    File URL: http://www.sciencedirect.com/science/article/B6W4V-4WGVPXY-1/2/f3e560feb9cc465005778988ff35b045
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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 19 (2010)
    Issue (Month): 2 (April)
    Pages: 295-303

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    Handle: RePEc:eee:reveco:v:19:y:2010:i:2:p:295-303

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    Web page: http://www.elsevier.com/locate/inca/620165

    Related research

    Keywords: Openness Liquidity cost Optimal interest rate Friedman rule;

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    18. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense," Economic Policy, CEPR & CES & MSH, vol. 21(48), pages 597-638, October.
    19. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
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