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Real Balance Effects and Monetary Policy

  • Alessandro Piergallini

This article presents a dynamic stochastic new Keynesian model with real balance effects. I find a number of results that would not appear in the traditional framework. It is shown that the real balance effect makes the so-called Taylor principle not necessary for determinacy of rational expectations equilibrium and that "passive" monetary rules may be feasible. In addition, within a class of policy rules constrained to be a linear function of state variables, "active" interest rate rules are more likely to be optimal under commitment rather than under discretion. (JEL E52, E58) Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ei/cbj029
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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 44 (2006)
Issue (Month): 3 (July)
Pages: 497-511

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Handle: RePEc:oup:ecinqu:v:44:y:2006:i:3:p:497-511
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