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Trend Growth and Learning About Monetary Policy Rules in a Two-Block World Economy

  • Eric Schaling
  • Mewael F. Tesfaselassie

Available evidence supports the view that growth is faster in more open economies. In order to analyze the implications of openness and growth on determinacy and learnability of worldwide rational expectations equilibria we develop a two-country New Keynesian model with growth. We analyze these issues for contemporaneous data and expectations-based monetary policy rules. Our results highlight how growth matters for the overall effect of opening an economy to more trade, as we find that (i) under the contemporaneous data policy rule the conditions for determinacy and learnability become more stringent on account of openness but less stringent on account of growth, so that growth weakens the effect of openness, (ii) under the expectations-based policy rule the conditions for determinacy and learnability also become more stringent on account of openness while on account growth the conditions for determinacy become \emph{more} stringent (thus reinforcing the effect of openness) but those for learnability become \emph{less} stringent (thus weakening the effect of openness). As in \citet{BS09} the elasticity of intertemporal substitution is key to our result but within a framework that is consistent with long-run labor supply and balanced growth facts

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File URL: https://www.ifw-members.ifw-kiel.de/publications/trend-growth-and-learning-about-monetary-policy-rules-in-a-two-block-world-economy/GrowthOpennessDeterminacy_KWP.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1818.

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Length: 29 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:kie:kieliw:1818
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  1. Evans , George W & Honkapohja, Seppo, 2007. "Expectations, learning and monetary policy: an overview of recent research," Research Discussion Papers 32/2007, Bank of Finland.
  2. James Bullard & Eric Schaling, 2009. "Monetary Policy, Determinacy, and Learnability in a Two-Block World Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1585-1612, December.
  3. Francisco Alcalá & Antonio Ciccone, 2001. "Trade and productivity," Economics Working Papers 580, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2002.
  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  5. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle and Indeterminacy," Quaderni di Dipartimento 097, University of Pavia, Department of Economics and Quantitative Methods.
  6. Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre.
  7. McCallum, Bennett T., 2007. "E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1376-1391, April.
  8. Kaushik Mitra & Seppo Honkapohja, 2004. "Performance of Monetary Policy with Internal Central Bank Forecasting," Royal Holloway, University of London: Discussion Papers in Economics 04/18, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  9. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  10. Akito Matsumoto, 2007. "The Role of Nonseparable Utility and Nontradeables in International Business Cycle and Portfolio Choice," IMF Working Papers 07/163, International Monetary Fund.
  11. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Monetary Policy, Trend Inflation and the Great Moderation:An Alternative Interpretation," Working Papers 94, Department of Economics, College of William and Mary.
  12. Mewael Tesfaselassie, 2011. "Trend Growth and Learning About Monetary Policy Rules," Kiel Working Papers 1744, Kiel Institute for the World Economy.
  13. Kurozumi, Takushi, 2006. "Determinacy and expectational stability of equilibrium in a monetary sticky-price model with Taylor rule," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 827-846, May.
  14. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  15. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  16. Sebastian Edwards, 1997. "Openness, Productivity and Growth: What Do We Really Know?," NBER Working Papers 5978, National Bureau of Economic Research, Inc.
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