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Stability Analysis in a Monetary Model With a Varying Intertemporal Elasticity of Substitution

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  • Orlando Gomes

Abstract

Models dealing with monetary policy are generally based on microfoundations that characterize the behavior of representative agents (households and firms). To explain the representative consumer behavior, it generally assumes a utility function in which the intertemporal elasticity of substitution is constant. Recent literature casts some doubts about the relevance of considering such a constant elasticity value. In this paper, the new Keynesian monetary policy model is explored under the assumption that the elasticity of substitution changes with expectations regarding real economic performance. As a result, one observes that some combinations of parameter values allow for a stable fixed point outcome, while other combinations of parameters are compatible with cycles of various periodicities and even aperiodic fluctuations.

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Bibliographic Info

Article provided by IUP Publications in its journal The IUP Journal of Monetary Economics.

Volume (Year): VII (2009)
Issue (Month): 2 (May)
Pages: 32-41

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Handle: RePEc:icf:icfjmo:v:07:y:2009:i:2:p:32-41

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  1. Ogaki, M. & Atkeson, A., 1993. "The Rate of Time Preference, The Intertemporal Elasticity of Substitution, and the leval of Wealth," RCER Working Papers 363, University of Rochester - Center for Economic Research (RCER).
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  7. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  8. Christopher Bliss, 2004. "Some Implications of a Variable EIS," Economics Papers 2004-W26, Economics Group, Nuffield College, University of Oxford.
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  12. Beaudry, Paul & van Wincoop, Eric, 1996. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol. 63(251), pages 495-512, August.
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