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Investment and the Taylor rule in a dynamic Keynesian model

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Author Info

  • Fazzari, Steven M.
  • Ferri, Piero
  • Greenberg, Edward

Abstract

We study monetary policy in a reduced-form dynamic model with bounded rationality and an empirically motivated investment function. Investment has important dynamic effects in our model. In particular, the cost of capital effect on investment is more important for monetary transmission than the more widely studied intertemporal substitution parameter in consumption. Furthermore, a strong Taylor rule response to unemployment in this model is more effective in stabilizing demand-induced fluctuations than a strong response to inflation. Indeed, an excessively aggressive response to inflation destabilizes the simulated output and inflation fluctuations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 10 (October)
Pages: 2010-2022

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:2010-2022

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Taylor rule Bounded rationality Investment;

References

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Cited by:
  1. Piero Ferri, 2013. "Income distribution and debts in a fragile economy: market processes and macro constraints," Journal of Economic Interaction and Coordination, Springer, vol. 8(2), pages 219-230, October.
  2. Okamoto, Yoshikazu & Nakamura, Akihiro, 2013. "The influence of local loop unbundling on investment by incumbent telecommunications operators in the OECD member countries," 24th European Regional ITS Conference, Florence 2013 88499, International Telecommunications Society (ITS).

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