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Macroeconomics in Times of Liquidity CrisesSearching for Economic Essentials$
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Guillermo A. Calvo

Print publication date: 2016

Print ISBN-13: 9780262035415

Published to MIT Press Scholarship Online: May 2017

DOI: 10.7551/mitpress/9780262035415.001.0001

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Nominal Anchoring with Liquid Monetary Policy Assets

Nominal Anchoring with Liquid Monetary Policy Assets

(p.75) 4 Nominal Anchoring with Liquid Monetary Policy Assets
Macroeconomics in Times of Liquidity Crises

Guillermo Calvo

The MIT Press

The chapter shows that existence of a unique Rational Expectations equilibrium can be ensured even if the Taylor Principle – stating that the policy interest rate increases by more than the increase in the expected rate of inflation – does not hold. This is shown by extending a barebones' central bank monetary model to the case in which liquidity is produced by both money and public bonds. The discussion concludes that liquidity considerations may have a critical impact on the monetary policy implications derived from the mainstream model.

Keywords:   Rational Expectations, Money, Public Bonds, Taylor Principle, Inflation, Interest Rate, Monetary Aggregates

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