Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098531 | Journal of Economic Dynamics and Control | 2014 | 16 Pages |
Abstract
This paper studies the equilibrium determinacy properties of a simple interest rate rule in a small open economy subject to currency substitution (i.e., the use of a foreign currency for domestic transactions) and risk premia on foreign borrowing. It shows that if currencies are substitute in the provision of liquidity services the rule׳s response to inflation has to be sufficiently above unity for the equilibrium to be locally determinate. This reinforced Taylor principle requirement appears to be more binding in economies characterized by a larger elasticity of currency substitution, more debt-elastic country risk premia, and intermediate degrees of dollarization in transactions.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Marco Airaudo,