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| Author: | McKnight, S. |
| Title: | Investment and interest rate policy in the open economy |
| Journal: | Oxford Economic Papers
2011 : DEC, VOL. 63:4, p. 673-699 |
| Index terms: | interest rates investments capital inflation central banks exchange rates monetary policy |
| Language: | eng |
| Abstract: | This article analyses the necessary and sufficient conditions to ensure interest rate policy not introducing real indeterminacy and thus self-fulfilling variation into open economies. An essential feature of the model is the including of capital and investment spending into the analysis. The conditions for real determinacy are investigated for two measures of inflation that central banks in open economies are able to target: domestic vs consumer price inflation. Heavily contrary to previous studies, in the presence of investment activity monetary policy targeting domestic price, inflation is more prone to self-fulfilling fluctuations than consumer price inflation targeting monetary policy. Nevertheless, the problem of indeterminacy identified under domestic price inflation can be ameliorated if the policy rule also responds to either the exchange rate or to output. |
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