Econ Theory https://doi.org/10.1007/s00199-018-1132-x RESEARCH ARTICLE Money growth targeting and indeterminacy in small open economies 1 2 Kevin X. D. Huang · Qinglai Meng · Jianpo Xue Received: 10 October 2017 / Accepted: 25 May 2018 © Springer-Verlag GmbH Germany, part of Springer Nature 2018 Abstract In a closed economy setting a cash-in-advance monetary economy under money growth targeting is prone to self-fulﬁlling expectations and beliefs-driven ﬂuc- tuations. This paper shows that such extrinsic instability is less of a problem in a small open economy integrated in the world goods and ﬁnancial markets. This is because endogenous terms-of-trade movements associated with global goods trade and cross- border capital ﬂows and endogenous international asset price adjustments associated with global ﬁnancial transaction serve as an endogenous stabilizer to reduce the like- lihood of sunspot equilibria. We ﬁnd that for empirically reasonable parametrization of the small open economy sunspot beliefs are unlikely to become self-fulﬁlled. Keywords Self-fulﬁlling expectations · Indeterminacy · Saddle-path stability · Money growth targeting · Small open economy JEL Classiﬁcation E3 · E4 · F3 · F4 We are grateful to two anonymous referees and the editor for very helpful comments and suggestions. Kevin X. D. Huang email@example.com Department of
Economic Theory – Springer Journals
Published: May 31, 2018
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