scholarly journals Interest Rate Rules and Multiple Equilibria in the Small Open Economy

2003 ◽  
Author(s):  
Luis-Felipe Zanna
Keyword(s):  
Interest Rate ◽  
Open Economy ◽  
Multiple Equilibria ◽  
Small Open Economy ◽  
Interest Rate Rules

Interest rate rules and equilibrium (in)determinacy in a small open economy: the role of internationally traded capital

2018 ◽  
Vol 18 (2) ◽  
Author(s):  
Wen-ya Chang ◽  
Hsueh-fang Tsai ◽  
Juin-jen Chang ◽  
Hsieh-yu Lin
Keyword(s):  
Interest Rate ◽  
Open Economy ◽  
Capital Mobility ◽  
Small Open Economy ◽  
International Capital ◽  
Interest Rate Rules ◽  
International Capital Mobility ◽  
Rate Feedback ◽  
Feedback Rule

Abstract This study develops a small-open-economy version of Benhabib, J., S. Schmitt-Grohé, and M. Uribe. 2001. “Monetary Policy and Multiple Equilibria.” American Economic Review 91: 167–186. We systematically explore the role of international capital mobility and the portfolio balance channel in terms of macroeconomic (in)stability when the government follows a commonly-adopted interest-rate feedback rule. In a one-traded-good model, the steady-state equilibrium, in general, is locally determinate; international capital mobility stabilizes the economy against business cycle fluctuations under a simple interest-rate feedback rule. In a two-good (traded and non-traded goods) model, the relationship between equilibrium (in)determinacy and the aggressiveness of interest rate rules is not monotonic, and crucially depends on households’ portfolio preferences. These results suggest that a unified interest rate rule can end up with very different consequences of macroeconomic (in)stability in an open economy from those in a closed economy.

Interest Rate–Economic Growth Nexus Under Currency Board Operations

2021 ◽  
Vol 8 (1) ◽  
pp. 13-24
Author(s):  
Martinianus Tshimologo Tibinyane ◽  
Teresia Kaulihowa
Keyword(s):  
Economic Growth ◽  
Interest Rate ◽  
Impulse Response ◽  
Response Function ◽  
Open Economy ◽  
Small Open Economy ◽  
Impulse Response Function ◽  
Policy Instrument ◽  
Variance Decomposition ◽  
Currency Board

This paper analyses the effect of the prime interest rate as a monetary policy instrument to stimulate economic growth in Namibia, a small open economy that is constrained by currency board operations. A Vector Autoregressive Model (VAR) was used for the period 1980–2019. The result shows that Namibia’s prime interest rate has no significant effect on economic growth. This finding remains robust and consistent when impulse response function and variance decomposition are employed. The impulse response function indicates a shock on the prime interest rate exhibits an inverse relationship. However, this effect is insignificant in both short and long-run scenarios. The variance decomposition indicates that the prime interest rate has a strongly exogenous impact, implying it has a weak influence on GDP growth. Policy implication indicates that small open economies under currency board operations need to identify different policy responses to circumvent external shocks and addresses their development needs.

scholarly journals TECHNOLOGY SHOCKS AND BUSINESS CYCLES IN INDIA

2017 ◽  
Vol 23 (5) ◽  
pp. 1721-1756 ◽  
Author(s):  
Shesadri Banerjee ◽  
Parantap Basu
Keyword(s):  
Interest Rate ◽  
Open Economy ◽  
Emerging Market ◽  
Small Open Economy ◽  
Annual Data ◽  
Technology Shocks ◽  
Demand Side ◽  
Aggregate Fluctuations ◽  
Dsge Model ◽  
Dynamic Stochastic

In this paper, we develop a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model to understand the relative importance of two key technology shocks, Hicks neutral total factor productivity (TFP) shock and investment specific technology (IST) shock for an emerging market economy like India. In addition to these two shocks, our model includes three demand side shocks such as fiscal spending, home interest rate, and foreign interest rate. Using a Bayesian approach, we estimate our DSGE model with Indian annual data for key macroeconomic variables over the period of 1971–2010, and for subsamples of pre-liberalization (1971–1990) and post-liberalization (1991–2010) periods. Our study reveals three main results. First, output correlates positively with TFP, but negatively with IST. Second, TFP and IST shocks are the first and the second most important contributors to aggregate fluctuations in India. In contrast, the demand side disturbances play a limited role. Third, although TFP plays a major role in determining aggregate fluctuations, its importance vis-à-vis IST has declined during the post liberalization era. We find that structural shifts of nominal friction and relative home bias for consumption to investment in the post-liberalization period can account for the rising importance of the IST shocks in India.

scholarly journals On the bifurcation of a torus in a small open economy model

2011 ◽  
Vol 48 (1) ◽  
pp. 125-134
Author(s):  
Katarína Makovínyiová ◽  
Rudolf Zimka
Keyword(s):  
Interest Rate ◽  
Exchange Rates ◽  
Open Economy ◽  
Invariant Torus ◽  
Small Open Economy ◽  
Sufficient Conditions ◽  
National Income ◽  
Macroeconomic Model ◽  
Money Stock ◽  
Economy Model

Abstract A four-dimensional macroeconomic model of a small open economy under fixed exchange rates is investigated. The model describes the development of national income, capital stock, interest rate and money stock. Sufficient conditions for the existence of an invariant torus are given. A numerical example illustrating the gained results is presented.

scholarly journals Risk Matters: The Real Effects of Volatility Shocks

2011 ◽  
Vol 101 (6) ◽  
pp. 2530-2561 ◽  
Author(s):  
Jesús Fernández-Villaverde ◽  
Pablo Guerrón-Quintana ◽  
Juan F Rubio-Ramírez ◽  
Martin Uribe
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Emerging Economies ◽  
Real Interest Rate ◽  
Small Open Economy ◽  
Real Interest Rates ◽  
The Real ◽  
Interest Rate Volatility ◽  
Business Cycle Model

We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We start by documenting the strong evidence of time-varying volatility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt. (JEL E13, E20, E32, E43, F32, F43, 011)

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