Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

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

Massimiliano Marzo () and Paolo Zagaglia
Additional contact information
Massimiliano Marzo: Universita di Bologna, Postal: Department of Economics, Universita di Bologna, Strada Maggiore, 45 Bologna, Italy
Paolo Zagaglia: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden. Research Unit, Bank of Finland, Finland

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

JEL-codes: C68; E52

28 pages, August 11, 2008

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