Economic (in)stability under monetary targeting

Luca Sessa

No 858, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Monetary growth targeting is often seen as an effective way of supporting macroeconomic stability. We scrutinize this property by checking whether multiplicity of equilibria, in the form of local indeterminacy (LI), can be both a possible and a plausible outcome of a basic model with an exogenous money growth policy rule. We address the question in different versions of the Sidrauski-Brock-Calvo framework, which isolates the contribution of monetary non-neutralities and monetary targeting. In line with previous literature, real effects of money are found to be a necessary condition for LI: we identify a single pattern for their magnitude if they are to be sufficient too. While the most elementary setups are unable to plausibly generate large enough real effects, LI becomes significantly more likely as one realistically considers additional channels of transmission of monetary expansions onto the real economy: in particular, we show that models in which holding money is valuable to both households and firms may yield a LI outcome for empirically relevant parameterizations, therefore casting some doubt on the stabilizing properties of monetary monitoring.

Keywords: local indeterminacy; monetary targeting; real effects of money; money-in-the-utility-function; money-in-the-production-function (search for similar items in EconPapers)
JEL-codes: E41 E5 E52 E58 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_858_12

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