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Re-examining the Importance of Trade Openness for Aggregate Instability

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

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Abstract

This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted.

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Publisher Info
Paper provided by School of Business, Reading University in its series Economics & Management Discussion Papers with number em-dp2007-52.

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Length: 26 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:rdg:emxxdp:em-dp2007-52

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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
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  1. Kurozumi, Takushi, 2006. "Determinacy and expectational stability of equilibrium in a monetary sticky-price model with Taylor rule," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 827-846, May. [Downloadable!] (restricted)
  2. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2004. "Indeterminacy with inflation-forecast-based rules in a two-bloc model," International Finance Discussion Papers 797, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Javier Andrés & J. David López-Salido & Javier Vallés, 2006. "Money in an Estimated Business Cycle Model of the Euro Area," Economic Journal, Royal Economic Society, vol. 116(511), pages 457-477, 04. [Downloadable!] (restricted)
  4. Kremer, Jana & Lombardo, Giovanni & Werner, Thomas, 2003. "Money in a New-Keynesian model estimated with German data," Discussion Paper Series 1: Economic Studies 2003,15, Deutsche Bundesbank, Research Centre. [Downloadable!]
  5. 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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  6. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March. [Downloadable!] (restricted)
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  7. Ireland, Peter N, 2004. "Money's Role in the Monetary Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 969-83, December.
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  8. Stephen McKnight, 2007. "Real Indeterminacy and the Timing of Money in Open Economies," Economic Analysis Research Group Working Papers earg-wp2007-09, School of Business, Reading University. [Downloadable!]
  9. Luis-Felipe Zanna, 2003. "Interest rate rules and multiple equilibria in the small open economy," International Finance Discussion Papers 785, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. 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)
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