![Does trade openness matter for aggregate instability? [An article from: Journal of Economic Dynamics and Control]](https://www.ebooknetworking.net/books/B00/0RR/bigB000RR1VPY.jpg)
Does trade openness matter for aggregate instability? [An article from: Journal of Economic Dynamics and Control]
Book Details
Author(s)F. De Fiore, Z. Liu
PublisherElsevier
ISBN / ASINB000RR1VPY
ISBN-13978B000RR1VP9
MarketplaceFrance 🇫🇷
Description
This digital document is a journal article from Journal of Economic Dynamics and Control, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
Description:
This paper presents a cash-in-advance model of a small open economy and shows that whether an inflation-targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade. This result emerges regardless of whether prices are sticky or flexible. In a closed economy, as the monetary authority responds to movements in inflation, the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect. In a small open economy, this policy also induces changes in the terms of trade, which, depending on the degree of openness, can generate counteracting effects on consumption. As a consequence, the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy.
Description:
This paper presents a cash-in-advance model of a small open economy and shows that whether an inflation-targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade. This result emerges regardless of whether prices are sticky or flexible. In a closed economy, as the monetary authority responds to movements in inflation, the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect. In a small open economy, this policy also induces changes in the terms of trade, which, depending on the degree of openness, can generate counteracting effects on consumption. As a consequence, the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy.
