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

McKnight, S. and Mihailov, A. ORCID: https://orcid.org/0000-0003-4307-4029 (2015) Do real balance effects invalidate the Taylor principle in closed and open economies? Economica, 82 (328). pp. 938-975. ISSN 1468-0335 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
URI	https://centaur.reading.ac.uk/id/eprint/37700
Identification Number/DOI	10.1111/ecca.12134
Refereed	Yes
Divisions	Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
Publisher	Wiley-Blackwell
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