Money growth targeting and indeterminacy in small open economies

Kevin Huang (), Qinglai Meng and Jianpo Xue
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Qinglai Meng: Oregon State University

Economic Theory, 2019, vol. 68, issue 3, No 1, 499-535

Abstract: Abstract In a closed economy setting a cash-in-advance monetary economy under money growth targeting is prone to self-fulfilling expectations and beliefs-driven fluctuations. This paper shows that such extrinsic instability is less of a problem in a small open economy integrated in the world goods and financial markets. This is because endogenous terms-of-trade movements associated with global goods trade and cross-border capital flows and endogenous international asset price adjustments associated with global financial transaction serve as an endogenous stabilizer to reduce the likelihood of sunspot equilibria. We find that for empirically reasonable parametrization of the small open economy sunspot beliefs are unlikely to become self-fulfilled.

Keywords: Self-fulfilling expectations; Indeterminacy; Saddle-path stability; Money growth targeting; Small open economy (search for similar items in EconPapers)
JEL-codes: E3 E4 F3 F4 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00199-018-1132-x

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