Exploring counter-cyclical monetary policy in a small open economy using the portfolio balance approach

Carlos Eduardo Drumond and Arslan Razmi

Review of Keynesian Economics, 2025, vol. 13, issue 1, 94-111

Abstract: Whether or not the money supply is endogenously determined in response to demand variations has been the subject of recent debates. Regardless of the answer to this question, central banks can and do react to cyclical fluctuations, and their responses, in turn, affect the balance of payments and the foreign asset position. We explore the feasibility of a counter-cyclical monetary policy rule in a small open-economy portfolio balance set-up where assets are imperfect substitutes, capacity utilization endogenously adjusts in a neo-Kaleckian manner to clear the goods market, the exchange rate is flexible, and prices are fixed. This set-up, under some non-restrictive conditions, generates a stable steady-state solution, suggesting that a monetary policy based on a counter-cyclical interest-rate rule is a viable option for macroeconomic stabilization.

Keywords: Stabilization; Business cycles; Portfolio balance model; Interest-rate rule; Exchange-rate dynamics (search for similar items in EconPapers)
JEL-codes: E12 E52 E58 F32 F41 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.elgaronline.com/view/journals/roke/13/1/article-p94.xml
Restricted Access

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:elg:rokejn:v:13:y:2025:i:1:p94-111

Access Statistics for this article

Review of Keynesian Economics is currently edited by Thomas Palley, Matías Vernengo and Esteban Pérez Caldentey

More articles in Review of Keynesian Economics from Edward Elgar Publishing
Bibliographic data for series maintained by Phillip Thompson ().