Limited Asset Market Participation and Determinacy in the Open Economy
Inflation targeting runs a high risk of indeterminacy when a share of households are too poor to save is an artifact of the closed economy
Abstract
皇冠体育app perception that inflation targeting (IT) runs a high risk of indeterminacy when a significant share of households are too poor to save is an artifact of the closed economy. In the open economy, the Taylor principle is generally valid for both contemporaneous and forward-looking IT. Active policy in contemporaneous IT guarantees determinacy, eccentric cases aside. In forward-looking IT, the scope for active policy is constrained by an upper bound on the Taylor coefficient. 皇冠体育app upper bound is insensitive, however, to the share of poor, nonsaving households. Moreover, it can be increased substantially鈥搕o a level that does not bind鈥搕hrough reserve sales/purchases that limit exchange rate volatility.
This work is part of the 鈥楳acroeconomics in Low-income countries鈥� programme
Citation
Buffie, E., Zanna, L. (2018). Limited Asset Market Participation and Determinacy in the Open Economy.聽Macroeconomic Dynamics,聽22(8), 1937-1977. doi:10.1017/S1365100516000961