Article thumbnail

Investment and Interest Rate Policy in the Open Economy

By Stephen McKnight

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

OAI identifier:

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.

Suggested articles