Real Balance Effects and Monetary Policy

Economic Inquiry, 2006, vol. 44, issue 3, pages 497-511

Abstract: This article presents a dynamic stochastic new Keynesian model with real balance effects. I find a number of results that would not appear in the traditional framework. It is shown that the real balance effect makes the so-called Taylor principle not necessary for determinacy of rational expectations equilibrium and that "passive" monetary rules may be feasible. In addition, within a class of policy rules constrained to be a linear function of state variables, "active" interest rate rules are more likely to be optimal under commitment rather than under discretion. (JEL E52, E58) Copyright 2006, Oxford University Press.

JEL-codes: E52 E58 (search for similar items in EconPapers)

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