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Interest Rate Control Rules and Macroeconomic Stability in a Heterogeneous Two-Country Model

  • Fujisaki, Seiya
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    We analyze relations between several types of interest rate control rules and equilibrium determinacy using a two-country model featuring preference and production parameters that may differ between countries, in which two kinds of goods are tradable. Such heterogeneity may violate the Taylor principle, which implies that aggressive monetary policy is desirable to attain determinate equilibrium. We evaluate the forms of interest rate control needed to attain macroeconomic stability in consideration of the heterogeneity.

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    File URL: https://mpra.ub.uni-muenchen.de/37017/1/MPRA_paper_37017.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37017.

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    Date of creation: 01 Mar 2012
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    Handle: RePEc:pra:mprapa:37017
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    1. Stephen McKnight, 2007. "Investment and Interest Rate Policy in the Open Economy," Economic Analysis Research Group Working Papers earg-wp2007-11, Henley Business School, Reading University.
    2. Andrea Ferrero & Mark Gertler & Lars E. O. Svensson, 2008. "Current account dynamics and monetary policy," Working Paper Series 2008-26, Federal Reserve Bank of San Francisco.
    3. Ulrich Gunter, 2009. "Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules," Vienna Economics Papers 0903, University of Vienna, Department of Economics.
    4. Stephen McKnight, 2011. "Real indeterminacy and the timing of money in open economies," Serie documentos de trabajo del Centro de Estudios Económicos 2011-01, El Colegio de México, Centro de Estudios Económicos.
    5. Timothy Kam, 2004. "Two-sided Learning and Optimal Monetary Policy in an Open Economy Model," Economics Discussion / Working Papers 04-07, The University of Western Australia, Department of Economics.
    6. Eric Schaling & James Bullard, 2005. "Monetary Policy, Determinacy, and Learnability in the Open Economy," Computing in Economics and Finance 2005 362, Society for Computational Economics.
    7. 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.
    8. Marco Airaudo & Luis-Felipe Zanna, 2004. "Endogenous Fluctuations in Open Economies: the Perils of Taylor Rules Revisited," Econometric Society 2004 Latin American Meetings 80, Econometric Society.
    9. Batini, Nicoletta & Levine, Paul & Pearlman, Joseph G., 2004. "Indeterminacy with inflation-forecast-based rules in a two-bloc model," Working Paper Series 0340, European Central Bank.
    10. Chen, Shu-hua & Shaw, Ming-fu & Lai, Ching-chong & Chang, Juin-jen, 2008. "Interest-rate rules and transitional dynamics in an endogenously growing open economy," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 54-75, February.
    11. Campbell Leith & Simon Wren-Lewis, 2002. "Taylor Rules in the Open Economy," Working Papers 2002_14, Business School - Economics, University of Glasgow.
    12. Laurence Ball, 1998. "Policy Rules for Open Economies," RBA Research Discussion Papers rdp9806, Reserve Bank of Australia.
    13. Wang, Q., 2006. "Learning Stability for Monetary Policy Rules in a Two-Country Model," Cambridge Working Papers in Economics 0659, Faculty of Economics, University of Cambridge.
    14. Benigno, Gianluca & Benigno, Pierpaolo, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 0279, European Central Bank.
    15. Kam, Timothy, 2007. "Interest-rate smoothing in a two-sector small open economy," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 283-304, June.
    16. Marco Airaudo & Luis-Felipe Zanna, 2005. "Interest rate rules, endogenous cycles, and chaotic dynamics in open economies," International Finance Discussion Papers 849, Board of Governors of the Federal Reserve System (U.S.).
    17. Roger E. A. Farmer & Amartya Lahiri, 2005. "A Two-Country Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 68-88, January.
    18. De Fiore, Fiorella & Liu, Zheng, 2005. "Does trade openness matter for aggregate instability?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1165-1192, July.
    19. Stephen McKnight & Alexander Mihailov, 2007. "Re-examining the Importance of Trade Openness for Aggregate Instability," Economics & Management Discussion Papers em-dp2007-52, Henley Business School, Reading University.
    20. repec:ebl:ecbull:v:5:y:2007:i:11:p:1-7 is not listed on IDEAS
    21. Luis-Felipe Zanna, 2003. "Interest rate rules and multiple equilibria in the small open economy," International Finance Discussion Papers 785, Board of Governors of the Federal Reserve System (U.S.).
    22. Yoshiyasu Ono, 2006. "International Asymmetry In Business Activity And Appreciation Of A Stagnant Country'S Currency," The Japanese Economic Review, Japanese Economic Association, vol. 57(1), pages 101-120.
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