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Economic (in)stability under monetary targeting

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  • Luca Sessa

    () (Bank of Italy)

Abstract

Monetary growth targeting is often seen as an effective way of supporting macroeconomic stability. We scrutinize this property by checking whether multiplicity of equilibria, in the form of local indeterminacy (LI), can be both a possible and a plausible outcome of a basic model with an exogenous money growth policy rule. We address the question in different versions of the Sidrauski-Brock-Calvo framework, which isolates the contribution of monetary non-neutralities and monetary targeting. In line with previous literature, real effects of money are found to be a necessary condition for LI: we identify a single pattern for their magnitude if they are to be sufficient too. While the most elementary setups are unable to plausibly generate large enough real effects, LI becomes significantly more likely as one realistically considers additional channels of transmission of monetary expansions onto the real economy: in particular, we show that models in which holding money is valuable to both households and firms may yield a LI outcome for empirically relevant parameterizations, therefore casting some doubt on the stabilizing properties of monetary monitoring.

Suggested Citation

  • Luca Sessa, 2012. "Economic (in)stability under monetary targeting," Temi di discussione (Economic working papers) 858, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_858_12
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2012/2012-0858/tema_858.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    local indeterminacy; monetary targeting; real effects of money; money-in-the-utility-function; money-in-the-production-function;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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