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MACROECONOMIC (IN)STABILITY OF INTEREST RATE RULES IN A MODEL WITH BANKING SYSTEM AND RESERVE MARKETS

Published online by Cambridge University Press:  21 March 2014

Shu-Hua Chen
Shu-Hua Chen*
Affiliation:
National Taipei University
*
Address correspondence to: Shu-Hua Chen, Department of Economics, National Taipei University, 151, University Rd., San Shia District, New Taipei City, 23741Taiwan; e-mail: shchen@mail.ntpu.edu.tw.
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Abstract

This paper develops a general equilibrium model with a banking system and a reserves market and shows that (i) the macroeconomic stabilizing properties of the nominal interest rate rules change quite substantially when we move from a model without a banking system to one with a banking system and a reserves market; (ii) the interplay between fiscal and monetary policies, in particular inflation-indexed versus non-indexed bonds, is crucial in determining the macroeconomic stabilizing properties of monetary rules; (iii) active rules and passive rules perform equally in regard to their macroeconomic stabilizing properties; (iv) continuous- and discrete-time specifications deliver the same/different (in)determinacy results for both the labor-only model and the endogenous-capital model under forward-looking/current-looking rules; (v) the inclusion of physical investment narrows the indeterminacy region under forward-looking rules; and (vi) current-looking rules make equilibrium determinacy impossible for both the labor-only economy and the endogenous-capital economy. Economic intuitions are provided.

Keywords

Nominal Interest Rate RulesIndeterminacyOpen Market OperationsCredit Channel of Monetary Policy Transmission
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 7 , October 2015 , pp. 1476 - 1508
Copyright
Copyright © Cambridge University Press 2014 

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