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Real Balance Effects, Determinacy and Optimal Monetary Policy

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  • Piergallini, Alessandro

Abstract

This paper presents a dynamic New Keynesian macroeconomic model with real balance effects. Both the conditions of equilibrium determinacy under an interest rate rule of the Taylor-type and the implications for optimal monetary policy are considered. We 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. A relatively "passive" monetary policy is found to be feasible also in the long run, but not necessarily optimal. In particular, within a class of policy rules constrained to be a linear function of state variables, an "active" optimal interest rate rule is more likely to be verified under commitment rather than under discretion.

Suggested Citation

  • Piergallini, Alessandro, 2004. "Real Balance Effects, Determinacy and Optimal Monetary Policy," MPRA Paper 59832, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:59832
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    File URL: https://mpra.ub.uni-muenchen.de/59832/1/MPRA_paper_59832.pdf
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    References listed on IDEAS

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    Cited by:

    1. Donal Smith, 2015. "Collateral Constraints and the Interest Rate," Discussion Papers 15/22, Department of Economics, University of York.
    2. repec:eee:reveco:v:49:y:2017:i:c:p:223-242 is not listed on IDEAS
    3. Benjamin Carton, 2012. "Monetary-Policy Tradeoff in Overlapping Generations DSGE Models," DEM Working Papers Series 028, University of Pavia, Department of Economics and Management.
    4. Di Giorgio, Giorgio & Nisticò, Salvatore, 2013. "Productivity shocks, stabilization policies and the dynamics of net foreign assets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 210-230.
    5. Milani, Fabio, 2017. "Learning about the interdependence between the macroeconomy and the stock market," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 223-242.
    6. Castelnuovo, Efrem & Nisticò, Salvatore, 2010. "Stock market conditions and monetary policy in a DSGE model for the U.S," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1700-1731, September.
    7. Araújo, Eurilton, 2013. "Robust monetary policy with the consumption-wealth channel," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 296-311.
    8. Salvatore Nistico', 2011. "Optimal Monetary Policy and Stock-Prices Dynamics in a Non-Ricardian DSGE Model," Working Papers CASMEF 1107, Dipartimento di Economia e Finanza, LUISS Guido Carli.

    More about this item

    Keywords

    Real balance effects; determinacy; optimal monetary policy.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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