Investment and interest rate policy in the open economy

Stephen McKnight

Serie documentos de trabajo del Centro de Estudios Económicos from El Colegio de México, Centro de Estudios Económicos

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.

Keywords: real indeterminacy; open economy monetary models; trade openness; interest rate rules (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 E58 F41 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://cee.colmex.mx/dts/2011/DT-2011-2.pdf (application/pdf)

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 (2007)
Working Paper: Investment and Interest Rate Policy in the Open Economy (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:emx:ceedoc:2011-02

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