IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

From Money Aggregates to Interest Rate Rules in a Small Open Economy: A Second Order Approach

Listed author(s):
  • Carlos Montoro


    (Economics LSE)

  • Paul Castillo
  • Vicente Tuesta

We evaluate the second order solution of a general equilibrium model for a small open economy in the line of the "new open economy macroeconomics". We use this framework to explain some recent regularities observed in economies in which central banks move from using a money aggregate as the target towards a regime based on the control of the short-term interest rate. In particular, in those economies we observe that after the change of policy rule there is a decrease in the unconditional volatilities accompanied by a reduction in the unconditional mean in inflation and interest rates vis-a-vis an increase in the unconditional mean in money aggregates. By analyzing the second order solution we relax the assumption of certainty equivalence which permit us to consider the role of uncertainty in the equilibrium solution. Overall, unlike the linear approach, the second order solution of the model allow us to capture the decrease in the unconditional means of interest rate and inflation along with an increase in the unconditional mean of the money demand as a consequence of the reduction of volatility due to the change of regime, as it is observed in the data. The main mechanism stems from different forms of risks that arise from the second order solution.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 17.

in new window

Date of creation: 04 Jul 2006
Handle: RePEc:sce:scecfa:17
Contact details of provider: Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:17. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.