Determinacy and Taylor’s Rule with Different Degrees of Trade Openness in a Semi-New Keynesian Model

Gabriel Karagiannides and Christos Liambas

Applied Economics and Finance, 2019, vol. 6, issue 6, 43-53

Abstract: The determinacy question, concerning whether or not there is convergence to a unique equilibrium path, in an explicitly dynamic setting, has been addressed in closed economies but only scantily in an open one. We undertake this task, using a model that leads to a 4th -degree characteristic equation which cannot be handled analytically; therefore, we develop a particular algorithm to solve it. We show that the determinacy-consistent specification of Taylor’s rule depends, critically, on the greater or lower openness in the trade sector. Greater openness supports a novel specification of Taylor’s rule with stronger emphasis on output gaps and weaker emphasis on the price stability than in earlier studies. Under this rule, determinate equilibrium dynamics is shown to be possible. When trade openness decreases significantly, determinacy is still possible, but it is compatible with a far more conventional formulation Taylor’s rule where price stability has absolute priority.

Keywords: Taylor’s rule; trade openness; determinacy; Taylor’s principle (search for similar items in EconPapers)
JEL-codes: C54 E52 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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