Investment and interest rate policy in the open economy

Stephen McKnight

Oxford Economic Papers, 2011, vol. 63, issue 4, 673-699

Abstract: This paper analyses the necessary and sufficient conditions to ensure that interest rate policy does not introduce real indeterminacy and thus self-fulfilling fluctuations into open economies. A key feature of the model is the incorporation of capital and investment spending into the analysis. The conditions for real determinacy are examined for two measures of inflation that central banks' can target in open economies: domestic vs consumer price inflation. In stark contrast to previous studies, in the presence of investment activity monetary policy that targets domestic price inflation is more susceptible to self-fulfilling fluctuations than monetary policy rules that target consumer price inflation. However, the problem of indeterminacy identified under domestic price inflation can be ameliorated provided the policy rule also responds to either the exchange rate or to output. Copyright 2011 Oxford University Press 2011 All rights reserved, Oxford University Press.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1093/oep/gpr017 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Investment and interest rate policy in the open economy (2011)
Working Paper: Investment and Interest Rate Policy in the Open Economy (2007)
Working Paper: Investment and Interest Rate Policy in the Open Economy (2007)
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:oup:oxecpp:v:63:y:2011:i:4:p:673-699

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Oxford Economic Papers is currently edited by James Forder and Francis J. Teal

More articles in Oxford Economic Papers from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().