Worldwide Macroeconomic Stability and Monetary Policy Rules

FRB of St. Louis Working Paper No. 2006-040A

54 Pages Posted: 7 Jun 2006

See all articles by James Bullard

James Bullard

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Aarti Singh

The University of Sydney - School of Economics

Date Written: June 2007

Abstract

We study the interaction of multiple large economies in dynamic stochastic general equilibrium. Each economy has a monetary policymaker that attempts to control the economy through the use of a linear nominal interest rate feedback rule. We show how the determinacy of worldwide equilibrium depends on the joint behavior of policymakers worldwide. We also show how indeterminacy exposes all economies to endogenous volatility, even ones where monetary policy may be judged appropriate from a closed economy perspective. We construct and discuss two quantitative cases. In the 1970s, worldwide equilibrium was characterized by a two-dimensional indeterminacy, despite U.S. adherence to a version of the Taylor principle. In the last 15 years, worldwide equilibrium was still characterized by a one-dimensional indeterminacy, leaving all economies exposed to endogenous volatility. Our analysis provides a rationale for a type of international policy coordination, and the gains to coordination in the sense of avoiding indeterminacy may be large.

Keywords: Indeterminacy, sunspot equilibrium, Taylor principle, great inflation

JEL Classification: E52, F41, F42

Suggested Citation

Bullard, James and Singh, Aarti, Worldwide Macroeconomic Stability and Monetary Policy Rules (June 2007). FRB of St. Louis Working Paper No. 2006-040A, Available at SSRN: https://ssrn.com/abstract=906863 or http://dx.doi.org/10.2139/ssrn.906863

James Bullard (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
411 Locust Street
St. Louis, MO 63166
United States
314-444-8576 (Phone)

Aarti Singh

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
The University of Sydney
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://sydney.edu.au/arts/economics/staff/academic/aarti_singh.shtml

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