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Monetary Policy with an Endogenous Capital Stock When Inflation is Persistent

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  • Richard Mash

Abstract

The paper presents a monetary policy model with an endogenous capital stock when a backward–looking element in wage setting causes inflation persistence. We analyse how the endogeneity of the capital stock changes the macroeconomic dynamics with which policy interacts and its implications for optimal policy and time inconsistency. Capital stock endogeneity makes inflation more persistent in reduced form. This makes the optimal contemporaneous policy response to shocks more vigorous but the subsequent return to steady state more gradual. Observed output becomes more serially correlated. Capital endogeneity can also give rise to disinflation bias under discretion for some parameter values.

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  • Richard Mash, 2002. "Monetary Policy with an Endogenous Capital Stock When Inflation is Persistent," Manchester School, University of Manchester, vol. 70(S1), pages 55-86.
    • Handle: RePEc:bla:manchs:v:70:y:2002:i:s1:p:55-86
    DOI: 10.1111/1467-9957.70.s1.22
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    Cited by:

    1. Richard Mash, 2003. "New Keynesian Microfoundations Revisited: A Calvo-Taylor-Rule-of-Thumb Model and Optimal Monetary Policy Delegation," Economics Series Working Papers 174, University of Oxford, Department of Economics.

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