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Learning Stability for Monetary Policy Rules in a Two-Country Model

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  • Wang, Q.

Abstract

This work evaluates whether or not the interest rate rules under different exchange rate regimes lead to a REE that is both locally determinate and stable under adaptive learning by private agents. I find that monetary interdependence among countries is crucial for the determinacy and learning stability of the economy in the open economy case, even without the coordination of the policymakers. Under floating exchange rate regime, both countries should follow aggressive interest rate rules simultaneously, in order to obtain determinate and learnable REE. Furthermore, the openness diminishes the regions for the determinate and learnable rules relative to its closed economy counterpart under the .oating regime, while in other exchange rate regime, the additional reaction towards the level or change of nominal exchange rate will enlarge this region.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0659.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0659.

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Length: 29
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:cam:camdae:0659

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Related research

Keywords: Adaptive learning; interest rate rules; open economy; exchange rate regime; determinacy; learnability;

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  1. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
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Cited by:
  1. George W. Evans & Seppo Honkapohja, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," CDMA Working Paper Series 200802, Centre for Dynamic Macroeconomic Analysis.
  2. Fujisaki, Seiya, 2012. "Interest Rate Control Rules and Macroeconomic Stability in a Heterogeneous Two-Country Model," MPRA Paper 37017, University Library of Munich, Germany.

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