Investment and Interest Rate Policy in the Open Economy

Stephen McKnight ()

No earg-wp2007-11, Economic Analysis Research Group Working Papers from Henley Business School, Reading University

Abstract: This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced 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)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2007-10
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Related works:
Journal Article: Investment and interest rate policy in the open economy (2011)
Working Paper: Investment and interest rate policy in the open economy (2011)
Working Paper: Investment and Interest Rate Policy in the Open Economy (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:rdg:eargwp:earg-wp2007-11

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