Real Balance Effects, Determinacy and Optimal Monetary Policy

Piergallini, Alessandro (2004): Real Balance Effects, Determinacy and Optimal Monetary Policy.

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Abstract

This paper presents a dynamic New Keynesian macroeconomic model with real balance effects. Both the conditions of equilibrium determinacy under an interest rate rule of the Taylor-type and the implications for optimal monetary policy are considered. We find a number of results that would not appear in the traditional framework. It is shown that the real balance effect makes the so-called "Taylor principle" not necessary for determinacy of rational expectations equilibrium. A relatively "passive" monetary policy is found to be feasible also in the long run, but not necessarily optimal. In particular, within a class of policy rules constrained to be a linear function of state variables, an "active" optimal interest rate rule is more likely to be verified under commitment rather than under discretion.

Item Type:	MPRA Paper
Original Title:	Real Balance Effects, Determinacy and Optimal Monetary Policy
Language:	English
Keywords:	Real balance effects, determinacy, optimal monetary policy.
Subjects:	E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
Item ID:	59832
Depositing User:	Alessandro Piergallini
Date Deposited:	12 Nov 2014 02:26
Last Modified:	03 Oct 2019 22:09
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URI:	https://mpra.ub.uni-muenchen.de/id/eprint/59832

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