2008
24/2008
Determinacy of interest rate rules with bond transaction services in a cashless economy
Author(s): Massimiliano Marzo – Paolo Zagaglia
2008. 36 pages.
Publisher: Bank of Finland
ISBN 978-952-462-464-0 (Printed publication)
ISBN 978-952-462-465-7 (Web publication)
Search words: monetary policy, fiscal policy, government bonds, determinacy, E52, C68 , Massimiliano Marzo, Paolo Zagaglia
Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless New Keynesian model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosanct, and that the results of Leeper (1991) are confirmed.