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Economic Theory

, Volume 68, Issue 3, pp 499–535 | Cite as

Money growth targeting and indeterminacy in small open economies

  • Kevin X. D. HuangEmail author
  • Qinglai Meng
  • Jianpo Xue
Research Article
  • 292 Downloads

Abstract

In a closed economy setting a cash-in-advance monetary economy under money growth targeting is prone to self-fulfilling expectations and beliefs-driven fluctuations. This paper shows that such extrinsic instability is less of a problem in a small open economy integrated in the world goods and financial markets. This is because endogenous terms-of-trade movements associated with global goods trade and cross-border capital flows and endogenous international asset price adjustments associated with global financial transaction serve as an endogenous stabilizer to reduce the likelihood of sunspot equilibria. We find that for empirically reasonable parametrization of the small open economy sunspot beliefs are unlikely to become self-fulfilled.

Keywords

Self-fulfilling expectations Indeterminacy Saddle-path stability Money growth targeting Small open economy 

JEL Classification

E3 E4 F3 F4 

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsVanderbilt UniversityNashvilleUSA
  2. 2.Department of EconomicsOregon State UniversityCorvallisUSA
  3. 3.China Financial Policy Research Center, School of FinanceRenmin University of ChinaBeijingChina

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