Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework

William Barnett and Unal Eryilmaz
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Unal Eryilmaz: Ministry of Treasury and Finance, Ankara, Turkey

No 202203, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: We analyze determinacy in the baseline open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy structure causes multifaceted behaviors in the system creating extra challenges for policy making. The degree of openness significantly affects determinacy properties of equilibrium under various forms and timing of monetary policy rules. Conditions for the uniqueness and local stability of equilibria are established. Determinacy diagrams are constructed to display the regions of unique and multiple equilibria. Numerical analyses are performed to confirm the theoretical results. Limit cycles and periodic behaviors are possible, but in some cases only for unrealistic parameter settings. Complex structures of open economies require rigorous policy design to achieve optimality.

Keywords: Bifurcation; determinacy; Dynamic systems; New Keynesian; Stability; Open economy; Taylor Principle (search for similar items in EconPapers)
JEL-codes: C14 C22 C52 C61 C62 E32 E37 E61 L16 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-ore
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Working Paper: Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework (2022)
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