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A NOTE ON TREND GROWTH AND LEARNING ABOUT MONETARY POLICY RULES IN A TWO-BLOCK WORLD ECONOMY

Published online by Cambridge University Press:  05 October 2015

Eric Schaling  and
Mewael F. Tesfaselassie
Eric Schaling
Affiliation:
Wits Business School, University of the Witwatersrand
Mewael F. Tesfaselassie*
Affiliation:
Kiel Institute for the World Economy
*
Address correspondence to: Mewael F. Tesfaselassie, Kiellinie 66, 24105 Kiel, Germany; email: mewael.tesfaselassie@ifw-kiel.de.
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Abstract

We analyze the implications of openness and growth for determinacy and learnability of rational expectations equilibria in a two-country New Keynesian model with alternative monetary policy rules. Under the contemporaneous data rule, the conditions for determinacy and learnability become more stringent as a result of openness but less stringent as a result of growth, so that growth weakens the effect of openness. Under the expectations-based rule, the conditions for determinacy and learnability also become more stringent as a result of openness, whereas as a result of trend growth the conditions for determinacy also become more stringent (thus reinforcing the effect of openness) but those for learnability become less stringent (thus weakening the effect of openness). As in related studies, 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.

Keywords

Trend GrowthOpen EconomyMonetary Policy RulesDeterminacyLearning
Type
Notes
Information
Macroeconomic Dynamics , Volume 21 , Issue 1 , January 2017 , pp. 243 - 258
Copyright
Copyright © Cambridge University Press 2015 

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