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

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

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Orlando Gomes

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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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Article provided by Icfai Press in its journal The Icfai University 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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Paper
- Gomes, Orlando, 2007. "Stability analysis in a monetary model with a varying intertemporal elasticity of substitution," MPRA Paper 2890, University Library of Munich, Germany. [Downloadable!]

References listed on IDEAS
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Other versions:
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Other versions:
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Other versions:
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