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 frame-work. 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.

Piergallini, A. (2004). Real balance effects, determinacy and optimal monetary policy.

Real balance effects, determinacy and optimal monetary policy

PIERGALLINI, ALESSANDRO
2004-01

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 frame-work. 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.
Settore SECS-P/02 - Politica Economica
en
real balance effects
determinacy
optimal monetary policy
Piergallini, A. (2004). Real balance effects, determinacy and optimal monetary policy.
Piergallini, A
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2108/200
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