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Monetary Policy with an Endogenous Capital Stock when Inflation is Persistent

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Author Info
Richard Mash

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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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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 108.

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Date of creation: 2002
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Handle: RePEc:oxf:wpaper:108

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Keywords: monetary policy time inconsistency inflation persistence investment capital stock

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrew Glyn, 2004. "Comparing sectoral productivity across countries," Economics Series Working Papers 195, University of Oxford, Department of Economics. [Downloadable!]
  2. Daniel John Zizzo, 2004. "Positive Harmony Transformations and Equilibrium Selection in Two-Player Games," Economics Series Working Papers 197, University of Oxford, Department of Economics. [Downloadable!]
  3. 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. [Downloadable!]
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