Kiel Working Papers, Kiel Institute for World Economics
No 1818:
Trend Growth and Learning About Monetary Policy Rules in a Two-Block World Economy
Eric Schaling and Mewael F. Tesfaselassie
Abstract: Available evidence supports the view that growth is faster
in more open economies. In order to analyze the implications of openness
and growth on determinacy and learnability of worldwide rational
expectations equilibria we develop a two-country New Keynesian model with
growth. We analyze these issues for contemporaneous data and
expectations-based monetary policy rules. Our results highlight how growth
matters for the overall effect of opening an economy to more trade, as we
find that (i) under the contemporaneous data policy rule the conditions for
determinacy and learnability become more stringent on account of openness
but less stringent on account of growth, so that growth weakens the effect
of openness, (ii) under the expectations-based policy rule the conditions
for determinacy and learnability also become more stringent on account of
openness while on account growth the conditions for determinacy become
\emph{more} stringent (thus reinforcing the effect of openness) but those
for learnability become \emph{less} stringent (thus weakening the effect of
openness). As in \citet{BS09} the elasticity of intertemporal substitution
is key to our result but within a framework that is consistent with
long-run labor supply and balanced growth facts
Keywords: trend growth,open economy,monetary policy rules,determinacy,learning; (follow links to similar papers)
JEL-Codes: E58,; E61,; F31,; F41; (follow links to similar papers)
29 pages, January 2013
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