Monetary Policy, Determinacy, and Learnability in a Two-Block World Economy

Authors


  • This paper was presented at the third conference of the International Research Forum on Monetary Policy at the European Central Bank (ECB). The forum is sponsored by the ECB, the Board of Governors of the Federal Reserve System, the Center for German and European Studies at Georgetown University, and the Center for Financial Studies at Goethe University. Earlier versions were also presented at CentER, the University of Johannesburg, Bonn University, the Bank for International Settlements, the Bank of England, De Nederlandsche Bank, the University of Cape Town, and the South African Reserve Bank. Helpful comments by two anonymous referees and Jordi Galí, Martin Ellison, Albert Marcet, Vicente Tuesta, and Ed Nelson are gratefully acknowledged. All views expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. This paper was written while Eric Schaling was a visiting scholar at the Research Department of the Federal Reserve Bank of St. Louis.

Abstract

We study how determinacy and learnability of worldwide rational expectations equilibrium may be affected by monetary policy in a simple, two-country, New Keynesian framework under both fixed and flexible exchange rates. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation.

Ancillary