Interest Rate Control Rules and Macroeconomic Stability in a Heterogeneous Two-Country Model

We analyze relations between several types of interest rate control rules and equilibrium determinacy using a two-country model featuring preference and production parameters that may differ between countries, in which two kinds of goods are tradable. Such heterogeneity may violate the Taylor principle, which implies that aggressive monetary policy is desirable to attain determinate equilibrium. We evaluate the forms of interest rate control needed to attain macroeconomic stability in consideration of the heterogeneity.