Money growth targeting and indeterminacy in small open economies

Money growth targeting and indeterminacy in small open economies 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 kevin.huang@vanderbilt.edu Department of http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economic Theory Springer Journals

Money growth targeting and indeterminacy in small open economies

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2018 by Springer-Verlag GmbH Germany, part of Springer Nature
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Game Theory, Economics, Social and Behav. Sciences; Microeconomics; Public Finance
ISSN
0938-2259
eISSN
1432-0479
D.O.I.
10.1007/s00199-018-1132-x
Publisher site
See Article on Publisher Site

Abstract

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 kevin.huang@vanderbilt.edu Department of

Journal

Economic TheorySpringer Journals

Published: May 31, 2018

References

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