Deutsche Bundesbank Economic Research Centre Working Paper No. 22/02
36 Pages Posted: 30 Mar 2003
Date Written: August 2002
We consider the properties of two monetary policy rules (monetary targeting, Taylor-type interest rate rule) in an intertemporal equilibrium model with capital accumulation and two outside assets (government bonds, fiat money). The paper shows that the long-run behaviour of the economy depends critically on whether under the monetary-fiscal regime the steady-state real interest rate is independent of inflation. If this is the case, there exists in our model a unique steady state with stable adjustment dynamics under either monetary policy rule. By contrast, if superneutrality fails, dynamics under the interest rate rule may suffer from global indeterminacy arising from multiple steady states which do not necessarily differ in terms of the 'activeness' of the interest rate feedback on inflation. This is ruled out under monetary targeting.
Keywords: Monetary Policy, Fiscal regimes, Overlapping generations
JEL Classification: E52, E63, H62
Suggested Citation: Suggested Citation
von Thadden, Leopold, Monetary and Fiscal Policy Rules in a Model with Capital Accumulation and Potentially Non-superneutral Money (August 2002). Deutsche Bundesbank Economic Research Centre Working Paper No. 22/02. Available at SSRN: https://ssrn.com/abstract=375420 or http://dx.doi.org/10.2139/ssrn.375420