Accessibility navigation


Do real balance effects invalidate the Taylor principle in closed and open economies?

McKnight, S. and Mihailov, A. (2015) Do real balance effects invalidate the Taylor principle in closed and open economies? Economica, 82 (328). pp. 938-975. ISSN 1468-0335

[img]
Preview
Text - Accepted Version
· Please see our End User Agreement before downloading.

361kB

It is advisable to refer to the publisher's version if you intend to cite from this work. See Guidance on citing.

To link to this item DOI: 10.1111/ecca.12134

Abstract/Summary

This paper examines the determinacy implications of forecast-based monetary policy rules that set the interest rate in response to expected future inflation in a Neo-Wicksellian model that incorporates real balance effects. We show that the presence of such effects in closed economies restricts the ability of the Taylor principle to prevent indeterminacy of the rational expectations equilibrium. The problem is exacerbated in open economies, particularly if the policy rule reacts to consumer-price, rather than domestic-price, inflation. However, determinacy can be restored in both closed and open economies with the addition of monetary policy inertia.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:37700
Publisher:Wiley-Blackwell

Downloads

Downloads per month over past year

University Staff: Request a correction | Centaur Editors: Update this record

Page navigation