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Re-examining the Importance of Trade Openness for Aggregate Instability

Listed author(s):
  • Stephen McKnight

    ()

    (Department of Economics, University of Reading)

  • Alexander Mihailov

    ()

    (Department of Economics, University of Reading)

This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted.

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Paper provided by Henley Business School, Reading University in its series Economics & Management Discussion Papers with number em-dp2007-52.

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Length: 26 pages
Date of creation: Oct 2007
Handle: RePEc:rdg:emxxdp:em-dp2007-52
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