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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 2008:7:
Determinacy of Interest Rate Rules with Bond Transaction Services in a Cashless Economy

Massimiliano Marzo () and Paolo Zagaglia

Abstract: 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 variant of their 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 sacrosant. In general, the results of Leeper (1991) are confirmed.

Keywords: Monetary Policy; Fiscal Policy; Government Bonds; Determinacy; (follow links to similar papers)

JEL-Codes: C68; E52; (follow links to similar papers)

28 pages, August 11, 2008

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