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Trend growth and learning about monetary policy rules in a two-block world economy

Author

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  • Schaling, Eric
  • Tesfaselassie, Mewael F.
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 more stringent (thus reinforcing the effect of openness) but those for learnability become less stringent (thus weakening the effect of openness). As in Bullard and Schaling (2009) 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.

Suggested Citation

  • Schaling, Eric & Tesfaselassie, Mewael F., 2013. "Trend growth and learning about monetary policy rules in a two-block world economy," Kiel Working Papers 1818, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:1818
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    trend growth; open economy; monetary policy rules; determinacy; learning;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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