research

Investment and Interest Rate Policy in the Open Economy

Abstract

This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced aggregate instability.Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy

Similar works

Full text

thumbnail-image
Last time updated on 06/07/2012

This paper was published in Research Papers in Economics.

Having an issue?

Is data on this page outdated, violates copyrights or anything else? Report the problem now and we will take corresponding actions after reviewing your request.