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Economic (in)stability under monetary targeting

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  • Luca Sessa

    ()
    (Bank of Italy)

Abstract

Monetary growth targeting is often seen as an effective way of supporting macroeconomic stability. We scrutinize this property by checking whether multiplicity of equilibria, in the form of local indeterminacy (LI), can be both a possible and a plausible outcome of a basic model with an exogenous money growth policy rule. We address the question in different versions of the Sidrauski-Brock-Calvo framework, which isolates the contribution of monetary non-neutralities and monetary targeting. In line with previous literature, real effects of money are found to be a necessary condition for LI: we identify a single pattern for their magnitude if they are to be sufficient too. While the most elementary setups are unable to plausibly generate large enough real effects, LI becomes significantly more likely as one realistically considers additional channels of transmission of monetary expansions onto the real economy: in particular, we show that models in which holding money is valuable to both households and firms may yield a LI outcome for empirically relevant parameterizations, therefore casting some doubt on the stabilizing properties of monetary monitoring.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 858.

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Date of creation: Mar 2012
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Handle: RePEc:bdi:wptemi:td_858_12

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Related research

Keywords: local indeterminacy; monetary targeting; real effects of money; money-in-the-utility-function; money-in-the-production-function;

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  1. Lotti, Francesca & Marcucci, Juri, 2007. "Revisiting the empirical evidence on firms' money demand," Journal of Economics and Business, Elsevier, vol. 59(1), pages 51-73.
  2. Evan F. Koenig, 1989. "Real money balances and the timing of consumption: an empirical investigation," Research Paper 8906, Federal Reserve Bank of Dallas.
  3. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
  4. Amisano, Gianni & Fagan, Gabriel, 2013. "Money growth and inflation: A regime switching approach," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 118-145.
  5. Coenen, Guenter & Levin, Andrew & Wieland, Volker, 2003. "Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy," CFS Working Paper Series 2003/07, Center for Financial Studies (CFS).
  6. Alessandro Calza & Andrea Zaghini, 2011. "Sectoral money demand and the great disinflation in the US," Temi di discussione (Economic working papers) 785, Bank of Italy, Economic Research and International Relations Area.
  7. Hafer, R.W. & Haslag, Joseph H. & Jones, Garett, 2007. "On money and output: Is money redundant?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 945-954, April.
  8. Minford, Patrick & Srinivasan, Naveen, 2010. "Determinacy in New Keynesian Models: a role for money after all?," CEPR Discussion Papers 7960, C.E.P.R. Discussion Papers.
  9. Werner, Thomas & Lombardo, Giovanni & Kremer, Jana, 2003. "Money in a New-Keynesian model estimated with German data," Discussion Paper Series 1: Economic Studies 2003,15, Deutsche Bundesbank, Research Centre.
  10. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Money at Low Frequencies," CEPR Discussion Papers 5868, C.E.P.R. Discussion Papers.
  11. Juha Kilponen & Kai Leitemo, 2008. "Model Uncertainty and Delegation: A Case for Friedman's "k"-Percent Money Growth Rule?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 547-556, 03.
  12. Dreger, Christian & Wolters, Jürgen, 2010. "Investigating M3 money demand in the euro area," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 111-122, February.
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