Access

You are not currently logged in.

Access JSTOR through your library or other institution:

login

Log in through your institution.

If You Use a Screen Reader

This content is available through Read Online (Free) program, which relies on page scans. Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Journal Article

What to Stabilize in the Open Economy

Valerie R. Bencivenga, Elisabeth Huybens and Bruce D. Smith
International Economic Review
Vol. 43, No. 4 (Nov., 2002), pp. 1289-1307
Stable URL: http://www.jstor.org/stable/826968
Page Count: 19
Were these topics helpful?
See somethings inaccurate? Let us know!

Select the topics that are inaccurate.

Cancel
  • Read Online (Free)
  • Download ($39.00)
  • Subscribe ($19.50)
  • Add to My Lists
  • Cite this Item
Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
What to Stabilize in the Open Economy
Preview not available

Abstract

We consider the question how "best" to maintain price-level stability in an open economy, and evaluate three possible policy choices: (a) a constant money growth rate rule; (b) a fixed exchange rate; and (c) a policy of explicit commitment to a price-level target. In each case we assume that policy is conducted by injecting reserves into or withdrawing reserves from the "banking system." In evaluating the three regimes, we adopt the criterion that the "best" policy should leave the least scope for indeterminacy and "excessive" economic volatility. In a steady-state equilibrium, the choice of regime is largely irrelevant; any steady-state equilibrium under one regime can be duplicated by an appropriate choice of the "control" variable under any other regime. However, we show that the sets of equilibria under the three regimes are dramatically different. When all countries follow the policy of fixing a constant rate of money growth, there are no equilibria displaying endogenously arising volatility and there is no indeterminacy of equilibrium. Under a regime of fixed exchange rates, indeterminacies and endogenously arising fluctuations are impossible if and only if the country with the low "reserve-to-deposit" ratio is charged with maintaining the fixed rate. Finally, when one country targets the time path of its price level, under very weak conditions, there will be indeterminacy of equilibrium and endogenously arising volatility driven by expectations.

Page Thumbnails

  • Thumbnail: Page 
1289
    1289
  • Thumbnail: Page 
1290
    1290
  • Thumbnail: Page 
1291
    1291
  • Thumbnail: Page 
1292
    1292
  • Thumbnail: Page 
1293
    1293
  • Thumbnail: Page 
1294
    1294
  • Thumbnail: Page 
1295
    1295
  • Thumbnail: Page 
1296
    1296
  • Thumbnail: Page 
1297
    1297
  • Thumbnail: Page 
1298
    1298
  • Thumbnail: Page 
1299
    1299
  • Thumbnail: Page 
1300
    1300
  • Thumbnail: Page 
1301
    1301
  • Thumbnail: Page 
1302
    1302
  • Thumbnail: Page 
1303
    1303
  • Thumbnail: Page 
1304
    1304
  • Thumbnail: Page 
1305
    1305
  • Thumbnail: Page 
1306
    1306
  • Thumbnail: Page 
1307
    1307
Part of Sustainability