Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/152607 
Year of Publication: 
2002
Series/Report no.: 
ECB Working Paper No. 173
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper shows that the conditions under which inflation-targeting interest rate rules lead to equilibrium uniqueness in a small open economy in general differ from those in a closed economy. As the monetary authority adjusts nominal interest rates in response to inflation, the real interest rate changes. The overall effect of this change on aggregate demand has important implications for equilibrium determinacy. In an open economy, an increase in the real interest rate is transmitted to aggregate demand through an intertemporal substitution effect, as in a closed economy, but also through a terms of trade effect that is absent in the closed economy. These effects move aggregate demand in opposite directions. We find that, in a broad class of models, the conditions for local equilibrium uniqueness depend crucially on the degree of openness to international trade. Openness matters not only quantitatively, but also qualitatively.
Subjects: 
indeterminacy
interest rate rules
small open economy
Terms of Trade
JEL: 
E52
E58
F41
Document Type: 
Working Paper

Files in This Item:
File
Size
536.02 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.