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Trend inflation and Monetary policy rules: Determinacy analyses in New Keynesian model with capital accumulation

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  • Elena, Gerko
  • Kirill, Sossounov

Abstract

The eects of positive trend inflation is analyzed in the framework of the standard New-Keynesian model with Calvo price setting and capital accumulation. It is build on the work of Duport (2001) and Ascari and Ropele (2007) who separately considered eects of capital accumulation and trend inflation in the similar context. It is shown that the simultaneous presence of positive inflation and capital accumulation greatly aects determinacy property of equilibrium in this setup. Namely, in order to maintain stability in addition to actively react to inflation monetary authorities should react to output uctuations but not to a great extend. Overreaction to output may lead to indeterminacy. We also show that for a large set of plausible parameters standard Taylor rule leads to indeterminacy. Alternative monetary policy rules are also analyzed.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30551.

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Date of creation: 11 Jan 2011
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Handle: RePEc:pra:mprapa:30551

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Keywords: Indeterminacy Interest rate policy rule;

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  1. Ascari, Guido, 2002. "Staggered Price and Trend Inflation:Some Nuisances," Royal Economic Society Annual Conference 2002, Royal Economic Society 10, Royal Economic Society.
  2. Boivin, Jean & Giannoni, Marc, 2006. "Has Monetary Policy Become More Effective?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5463, C.E.P.R. Discussion Papers.
  3. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-01, C.V. Starr Center for Applied Economics, New York University.
  4. Ascari, Guido & Ropele, Tiziano, 2007. "Optimal monetary policy under low trend inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2568-2583, November.
  5. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," NBER Working Papers 14621, National Bureau of Economic Research, Inc.
  6. Guido Ascari & Tiziano Ropele, 2009. "Trend inflation, Taylor principle and indeterminacy," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 708, Bank of Italy, Economic Research and International Relations Area.
  7. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper, Federal Reserve Bank of Cleveland 0107, Federal Reserve Bank of Cleveland.
  9. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper, Federal Reserve Bank of Cleveland 0320, Federal Reserve Bank of Cleveland.
  10. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
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