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- Title
Do Real Balance Effects Invalidate the Taylor Principle in Closed and Open Economies?
- Authors
McKnight, Stephen; Mihailov, Alexander
- Abstract
This paper examines the determinacy implications of forecast-based monetary policy rules that set the interest rate in response to expected future inflation in a Neo-Wicksellian model that incorporates real balance effects. We show that the presence of such effects in closed economies restricts the ability of the Taylor principle to prevent indeterminacy of the rational expectations equilibrium. The problem is exacerbated in open economies, particularly if the policy rule reacts to consumer-price, rather than domestic-price, inflation. However, determinacy can be restored in both closed and open economies with the addition of monetary policy inertia.
- Subjects
ECONOMIC indicators; INTEREST (Finance); INTEREST rate futures; CREDIT control; INVESTMENT interest
- Publication
Economica, 2015, Vol 82, Issue 328, p938
- ISSN
0013-0427
- Publication type
Article
- DOI
10.1111/ecca.12134