Determinacy and Learnability of Monetary Policy Rules in Small Open Economies

By Luis-Gonzalo Llosa, Vicente Tuesta. 2006

386 citations recorded by the source corpus.

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 E-stability. 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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/d08e6d15c13ecdff331264bac8f3750d821b5843

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Citations in the corpus

Infrastructure or foreign direct investment?: An examination of the implications of MNE strategy for economic development (2009, background): “All rights reserved. doi:10.1016/j.jwb.2008.05.004 highly apposite from a poverty reduction perspective (Datt & Ravallion, 1998; Fay, Leipziger, Wodon, & Yepes, 2005) and yet is neglected in the discussion of the MNE impacts on poverty reduction.”
Going beyond Crosscountry Averages: Growth, Inequality and Poverty Reduction in the Philippines (2004, methodology): “2 See also Dutt and Ravallion (1998).”
The science of monetary policy: an imperfect knowledge perspective (2018, neutral): “The review also assumes a closed economy: there are open-economy extensions such as Llosa and Tuesta (2008), Llosa and Tuesta (2009), Bullard and Singh (2008) and Bullard and Schaling (2005).”
Infrastructure development and economic growth in India (2009, background): “Dutt and Ravallion (1998) prove that Indian states starting with better infrastructure and human resources, among other facilities, have witnessed significantly higher growth rates and poverty reduction.”
Are Low Food Prices Pro-Poor? Net Food Buyers and Sellers in Low-Income Countries (2008, background): “…multipliers have been discussed in the literature and they have been found to be important (Mellor 1976; Hagglade and Hazell 1989; Delgado et al 1998; Block 1999; Datt and Ravallion 1998; Rock 2002; Foster and Rosenzweig 2004, also see Haggblade, Hazel and Dorosh, 2007, for an extensive survey).”
Smart, Responsible, and Upper Caste Only: Measuring Caste Attitudes through Large-Scale Analysis of Matrimonial Profiles (2019, background): “Further, considering that the Southern states consistently rank higher in gender equity (Rahman and Rao 2004) and socioeconomic levels (Ravallion and Datt 1999)—variables that are associated with higher openness in our model—we would expect the states to rank higher in openness to intercaste marriag”
Rural Poverty (2009, background): “Datt and Ravallion (1998, 2002) and Ravallion and Datt (1996, 2002) discussed the growth and poverty alleviation experience of India, based on state-level averages, using data up to 1994, that is largely before the gradual opening of the Indian economy, even though overall growth had picked up…”
Economic growth in South Asia: Role of infrastructure (2012, background): “Dutt and Ravallion ( 1998 ) show that the Indian states with better infrastructure and human resources, among others, have seen significantly higher growth rates and poverty reduction.”
A Comparative Perspective on Poverty Reduction in Brazil, China, and India (2009, background): “Subnationally India’s disparities in literacy rates are driven more by the differences in female literacy, which has greater explanatory power for the rate of poverty reduction (Datt and Ravallion 1998b).”