Real Indeterminacy and the Timing of Money in Open Economies

Stephen McKnight

Economic Analysis Research Group Working Papers from Henley Business School, University of Reading

Abstract: This paper investigates the conditions under which interest-rate rules induce real equilibrium indeterminacy in a two-country, sticky-price, monetary model. Using a discrete-time framework, we employ the two most commonly used timing assumptions on which money balances enter into the utility function. This paper shows that the tim- ing equivalence result derived for a closed-economy no longer holds for open economies. This arises because modifications in the trading environment impact on the behavior of the real exchange rate. Consequently this helps explain the seemingly contradictory findings in the literature on real indeterminacy in open economies. Furthermore it challenges the belief that domestic inflation targeting is superior to consumer price inflation targeting, in minimizing aggregate instability.

Keywords: Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E32 E43 E53 E58 F41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Should Central Banks Target Consumer or Producer Prices? (2011)
Working Paper: Real indeterminacy and the timing of money in open economies (2011)
Working Paper: Real Indeterminacy and the Timing of Money in Open Economies (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:eargwp:earg-wp2007-09

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