Learning Stability for Monetary Policy Rules in a Two-Country Model

This work evaluates whether or not the interest rate rules under different exchange rate regimes lead to a REE that is both locally determinate and stable under adaptive learning by private agents. I find that monetary interdependence among countries is crucial for the determinacy and learning stability of the economy in the open economy case, even without the coordination of the policymakers. Under floating exchange rate regime, both countries should follow aggressive interest rate rules simultaneously, in order to obtain determinate and learnable REE. Furthermore, the openness diminishes the regions for the determinate and learnable rules relative to its closed economy counterpart under the .oating regime, while in other exchange rate regime, the additional reaction towards the level or change of nominal exchange rate will enlarge this region.