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Real Indeterminacy and the Timing of Money in Open Economies

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Author Info
Stephen McKnight () (Department of Economics, University of Reading)

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Abstract

This paper investigates the conditions under which interest-rate rules induce real equilibrium indeterminacy in a two-country, sticky-price, monetary model. Using a discrete-time framework, we employ the two most commonly used timing assumptions on which money balances enter into the utility function. This paper shows that the tim- ing equivalence result derived for a closed-economy no longer holds for open economies. This arises because modifications in the trading environment impact on the behavior of the real exchange rate. Consequently this helps explain the seemingly contradictory findings in the literature on real indeterminacy in open economies. Furthermore it challenges the belief that domestic inflation targeting is superior to consumer price inflation targeting, in minimizing aggregate instability.

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Publisher Info
Paper provided by Henley Business School, Reading University in its series Economic Analysis Research Group Working Papers with number earg-wp2007-09.

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Length: 31 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:rdg:eargwp:earg-wp2007-09

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Related research
Keywords: Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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. Carlstrom, Charles T. & Fuerst, Timothy S., 2005. "Investment and interest rate policy: a discrete time analysis," Journal of Economic Theory, Elsevier, vol. 123(1), pages 4-20, July. [Downloadable!] (restricted)
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  2. Galí, Jordi & Gertler, Mark & Lopez-Salido, Jose David, 2002. "Markups, Gaps and the Welfare Costs of Business Fluctuations," CEPR Discussion Papers 3212, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  4. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Timing and real indeterminacy in monetary models," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 285-298, April. [Downloadable!] (restricted)
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  5. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  7. De Fiore, Fiorella & Liu, Zheng, 2005. "Does trade openness matter for aggregate instability?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1165-1192, July. [Downloadable!] (restricted)
  8. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [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. Stephen McKnight & Alexander Mihailov, 2007. "Re-examining the Importance of Trade Openness for Aggregate Instability," Economics & Management Discussion Papers em-dp2007-52, Henley Business School, Reading University. [Downloadable!]
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  2. Stephen McKnight, 2007. "Investment and Interest Rate Policy in the Open Economy," Economics & Management Discussion Papers em-dp2007-51, Henley Business School, Reading University. [Downloadable!]
    Other versions:
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