Taylor rules and equilibrium determinacy in a two-country model with non-traded goods

- We analyze a relation between interest rate controls and equilibrium determinacy.
- We use a two-country model featuring traded and non-traded goods.
- The two countries are heterogeneous.
- It is easier to generate determinate equilibrium under liberalization of the economy.
- However, it is simpler for central banks to operate monetary policy in the economy with non-traded goods.

We analyze a relation between interest rate controls and equilibrium determinacy using a two-country model featuring traded and non-traded goods. In addition, parameters of preference and production may differ between the two countries. We find that macroeconomic stability strongly depends on such heterogeneity including monetary policy, and that it is easier to generate determinate equilibrium under perfect liberalization of the economy, but to operate monetary policy in the economy with non-traded goods.