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Short-term and long-term interest rates in a monetary model of a small open economy

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  • Turnovsky, Stephen J.

Abstract

This paper analyzes the effects of both anticipated and unanticipated monetary and fiscal disturbances, on the dynamic behavior of a monetary model of a small open economy. It focuses on the adjustment of the short-term and long-term interest rates and the divergence of their transitional paths, particularly in anticipation of these disturbances. The analysis demonstrates how anticipation of a future policy change can generate perverse short-run behavior. The essential reason for the divergence between the short and long rates is that the latter is dominated by long-term expectations, while the former is primarily determined by current influences.
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  • Turnovsky, Stephen J., 1986. "Short-term and long-term interest rates in a monetary model of a small open economy," Journal of International Economics, Elsevier, vol. 20(3-4), pages 291-311, May.
    • Handle: RePEc:eee:inecon:v:20:y:1986:i:3-4:p:291-311
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    1. Olivier J. Blanchard, 1991. "Current and Anticipated Deficits, Interest Rates and Economic Activity," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 361-390, National Bureau of Economic Research, Inc.
    2. Turnovsky, Stephen J & Miller, Marcus H, 1984. "The Effects of Government Expenditure on the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 16-33, February.
    3. Dornbusch, Rudiger, 1976. "Exchange rate expectations and monetary policy," Journal of International Economics, Elsevier, vol. 6(3), pages 231-244, August.
    4. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-143, March.
    5. Willem H. Buiter & Marcus Miller, 1983. "Changing the Rules: Economic Consequences of the Thatcher Regime," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 305-380.
    6. Jeffrey Sachs & Charles Wyplosz, 1984. "Real Exchange Rate Effects of Fiscal Policy," NBER Working Papers 1255, National Bureau of Economic Research, Inc.
    7. Gray, Malcolm R & Turnovsky, Stephen J, 1979. "The Stability of Exchange Rate Dynamics under Perfect Myopic Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(3), pages 643-660, October.
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    Cited by:

    1. Arman Mansoorian & Mohammed Mohsin, 2004. "Monetary policy in a cash-in-advance economy: employment, capital accumulation, and the term structure of interest rates," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 336-352, May.
    2. Antoine Bouveret & Bruno Ducoudre, 2007. "On the Contingency of Equilibrium Exchange Rates with Time - Consistent Economic Policies," SciencePo Working papers Main hal-01066080, HAL.
    3. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
    4. Offick Sven & Wohltmann Hans-Werner, 2016. "Partially Anticipated Monetary Policy Shocks – Are They Stabilizing or Destabilizing?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 236(1), pages 95-127, February.
    5. repec:spo:wpecon:info:hdl:2441/6125 is not listed on IDEAS
    6. repec:hal:spmain:info:hdl:2441/5221 is not listed on IDEAS
    7. repec:spo:wpmain:info:hdl:2441/6125 is not listed on IDEAS
    8. Arman Mansoorian & Mohammed Mohsin, 2004. "Monetary policy in a cash‐in‐advance economy: employment, capital accumulation, and the term structure of interest rates," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(2), pages 336-352, May.
    9. Kempa, Bernd & Nelles, Michael & Pierdzioch, Christian, 1999. "The term structure of interest rates in a sticky-price target zone model," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 817-834, October.
    10. repec:hal:wpspec:info:hdl:2441/6125 is not listed on IDEAS
    11. repec:hal:spmain:info:hdl:2441/6125 is not listed on IDEAS
    12. Steve Ambler, 1988. "Fiscal and monetary policy in an open economy with staggered wages," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 124(1), pages 58-73, March.
    13. Arman Mansoorian & Mohammed Mohsin, 2002. "The Employment, Investment and Current Account Effects of Exchange Rate Policies in a Cash-in-Advance Economy," Working Papers 2002_04, York University, Department of Economics.
    14. Fisher, Walter H., 1995. "An optimizing analysis of the effects of world interest disturbances on the open economy term structure of interest rates," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 105-126, February.
    15. repec:spo:wpmain:info:hdl:2441/5221 is not listed on IDEAS
    16. Walter Fisher, 2000. "The Term Structure of Interest Rates in a Small Open Economy: A Stochastic Analysis," Open Economies Review, Springer, vol. 11(3), pages 261-278, July.

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