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- Title
MACROECONOMIC (IN)STABILITY OF INTEREST RATE RULES IN A MODEL WITH BANKING SYSTEM AND RESERVE MARKETS.
- Authors
Chen, Shu-Hua
- Abstract
This paper develops a general equilibrium model with a banking system and a reserves market and shows that (i) the macroeconomic stabilizing properties of the nominal interest rate rules change quite substantially when we move from a model without a banking system to one with a banking system and a reserves market; (ii) the interplay between fiscal and monetary policies, in particular inflation-indexed versus non-indexed bonds, is crucial in determining the macroeconomic stabilizing properties of monetary rules; (iii) active rules and passive rules perform equally in regard to their macroeconomic stabilizing properties; (iv) continuous- and discrete-time specifications deliver the same/different (in)determinacy results for both the labor-only model and the endogenous-capital model under forward-looking/current-looking rules; (v) the inclusion of physical investment narrows the indeterminacy region under forward-looking rules; and (vi) current-looking rules make equilibrium determinacy impossible for both the labor-only economy and the endogenous-capital economy. Economic intuitions are provided.
- Subjects
MACROECONOMICS; STABILITY theory; INTEREST rates; BANKING industry; ECONOMIC equilibrium
- Publication
Macroeconomic Dynamics, 2015, Vol 19, Issue 7, p1476
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100513000904