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The B.E. Journal of Macroeconomics

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Interest rate rules and equilibrium (in)determinacy in a small open economy: the role of internationally traded capital

Wen-ya Chang / Hsueh-fang Tsai / Juin-jen Chang
  • Corresponding author
  • Institute of Economics, Academia Sinica, Nankang, Taipei 11529, Taiwan, R.O.C., Fax: +886-2-27853946
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/ Hsieh-yu Lin
Published Online: 2018-03-21 | DOI: https://doi.org/10.1515/bejm-2016-0128

Abstract

This study develops a small-open-economy version of Benhabib, J., S. Schmitt-Grohé, and M. Uribe. 2001. “Monetary Policy and Multiple Equilibria.” American Economic Review 91: 167–186. We systematically explore the role of international capital mobility and the portfolio balance channel in terms of macroeconomic (in)stability when the government follows a commonly-adopted interest-rate feedback rule. In a one-traded-good model, the steady-state equilibrium, in general, is locally determinate; international capital mobility stabilizes the economy against business cycle fluctuations under a simple interest-rate feedback rule. In a two-good (traded and non-traded goods) model, the relationship between equilibrium (in)determinacy and the aggressiveness of interest rate rules is not monotonic, and crucially depends on households’ portfolio preferences. These results suggest that a unified interest rate rule can end up with very different consequences of macroeconomic (in)stability in an open economy from those in a closed economy.

Keywords: indeterminacy; interest rate rules; international capital mobility; portfolio preference

JEL Classification: F41; E52; E31

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About the article

Published Online: 2018-03-21


Citation Information: The B.E. Journal of Macroeconomics, 20160128, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2016-0128.

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