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Monetary Policy, Currency Unions and Open Economy Macrodynamics

Author

Listed:
  • Toichiro Asada
  • Peter Flaschel
  • Gang Gong
  • Willi Semmler

Abstract

In this paper we extend an integrated closed-economy macrodynamic model to account for a large open economy in a currency area with fixed nominal exchange rates between the currencies. The major issues are the effectiveness and macrodynamic effects of monetary policy for countries in a pegged or fixed exchange rate system. The model assumes a leader-follower relationship as in Kenen (2002) where the dominant country pursues a monetary policy and the other countries adjust. We explore the effect of two policy rules - the monetary authority targeting the money supply or interest rate. The model augments Keynesian AS-AD growth dynamics by goods market disequilibrium, price and quantity adjustment processes and income distribution dynamics and is completely specified with respect budget and behavioral equations. The steady state of the resulting 7D dynamical system is asymptotically stable for sluggish responses to labor and goods market imbalances, if the Keynes-effect is strong and sales expectations sufficiently fast. Increasing adjustment speeds for wages, prices, inflationary expectations or inventories however implies loss of local stability by way of Hopf-bifurcations. Monetary policy rules augment the dimension of the considered dynamics by one (interest rate rule) or two (money supply rule) and may stabilize the economy to some extent if the adjustment speeds in these rules are chosen with care. Yet, behavioral nonlinearities are needed in addition to ensure economic viability over a larger range of the parameter values of the model.

Suggested Citation

  • Toichiro Asada & Peter Flaschel & Gang Gong & Willi Semmler, 2003. "Monetary Policy, Currency Unions and Open Economy Macrodynamics," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 10(19).
  • Handle: RePEc:czx:journl:v:10:y:2003:i:19:id:124
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    File URL: http://ces.utia.cas.cz/bulletin/index.php/bulletin/article/view/124
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    References listed on IDEAS

    as
    1. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184.
    2. H. Rose, 1967. "On the Non-Linear Theory of the Employment Cycle," Review of Economic Studies, Oxford University Press, vol. 34(2), pages 153-173.
    3. Franke, Reiner & Lux, Thomas, 1993. " Adaptive Expectations and Perfect Foresight in a Nonlinear Metzlerian Model of the Inventory Cycle," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 355-363.
    4. Franke, Reiner, 1996. "A Metzlerian model of inventory growth cycles," Structural Change and Economic Dynamics, Elsevier, vol. 7(2), pages 243-262, June.
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    Citations

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    Cited by:

    1. Puchet Anyul, Martín, 2008. "Ejercicios de política económica y sistemas de cuentas de los sectores institucionales," Estudios Estadísticos 65, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. repec:spr:lnecms:978-3-642-01565-6 is not listed on IDEAS
    3. Flaschel, Peter & Greiner, Alfred, 2012. "Flexicurity Capitalism: Foundations, Problems, and Perspectives," OUP Catalogue, Oxford University Press, number 9780199751587.

    More about this item

    Keywords

    Keynes-Metzler-Goodwin dynamics; fixed exchange rates; currency unions; large open economies; instability; employment cycles; monetary policy rules;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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