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Determinacy and learnability of equilibrium in a small-open economy with sticky wages and prices

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  • Araújo, Eurilton

Abstract

In a small-open economy model with nominal wage and price rigidities, it has been argued that, in terms of welfare losses, the monetary policy rule that responds to consumer price index (CPI) inflation performs better than rules that react to competing inflation measures. From the viewpoint of determinacy and learnability of rational expectations equilibrium (REE), this paper suggests that the rule that responds to CPI inflation does not increase the Central Bank's ability to promote the convergence of an economy to a determinate and learnable REE nor improves the speed of this convergence when compared with rules that react to contending inflation measures.

Suggested Citation

  • Araújo, Eurilton, 2016. "Determinacy and learnability of equilibrium in a small-open economy with sticky wages and prices," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 16-32.
  • Handle: RePEc:eee:reveco:v:45:y:2016:i:c:p:16-32
    DOI: 10.1016/j.iref.2016.04.014
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    More about this item

    Keywords

    Determinacy; Inflation; Learnability; Monetary policy rules;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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