Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/51493
Authors: 
Llosa, Gonzalo
Tuesta, Vicente
Year of Publication: 
2006
Series/Report no.: 
Working paper // Inter-American Development Bank, Research Department 576
Abstract: 
This paper evaluates under which conditions different Taylor-type rules lead to determinacy and expectational stability (E-stability) of rational expectations equilibrium in a simple 'New Keynesian' small open economy model, developed by Gali and Monacelli (2005). In particular, we extend the Bullard and Mitra (2002) results of determinacy and E-stability in a closed economy to this small open economy framework. Our results highlight an important link between the Taylor principle and both determinacy and learnability of equilibrium in small open economies. More importantly, the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways. A key finding is that, contrary to Bullard and Mitra, expectations-based rules that involve the CPI and/or the nominal exchange rate limit the region of E-stability and the Taylor Principle does not guarantee Estability. We also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability, yet these rules might not be desirable since they promote greater volatility in the economy.
Subjects: 
Learning
Indeterminacy
Monetary Policy Rules
Open Economy
JEL: 
E4
E5
F31
F41
Document Type: 
Working Paper

Files in This Item:
File
Size





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