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Money growth targeting and indeterminacy in small open economies

Author

Listed:
  • Kevin x.d. Huang

    () (Vanderbilt University)

  • Qinglai Meng

    () (Oregon State University)

  • Jianpo Xue

    () (Renmin University of China)

Abstract

In a closed economy setting a cash-in-advance monetary economy under money growth targeting is prone to self-fulfilling expectations and beliefs-driven fluctuations. This paper shows that such extrinsic instability is less of a problem in a small open economy integrated in the world goods and financial markets. This is because endogenous terms-of-trade movements associated with global goods trade and cross-border capital flows and endogenous international asset price adjustments associated with global financial transaction serve as an endogenous stabilizer to reduce the likelihood of sunspot equilibria. We find that for empirically reasonable parametrization of the small open economy sunspot beliefs are unlikely to become self-fulfilled.

Suggested Citation

  • Kevin x.d. Huang & Qinglai Meng & Jianpo Xue, 2018. "Money growth targeting and indeterminacy in small open economies," Vanderbilt University Department of Economics Working Papers 18-00005, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:vuecon-18-00005
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    References listed on IDEAS

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    More about this item

    Keywords

    self-fulfilling expectations; indeterminacy; saddle-path stability; money growth targeting; small open economy;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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