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Increasing Returns and the Design of Interest Rate Rules

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Author Info
Xiao, Wei (University of New Orleans)

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Abstract

We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the "Taylor principle" no longer guarantees either determinacy or E-stability of the rational expectations equilibrium.

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Publisher Info
Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2005-08.

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Length: 31 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:uno:wpaper:2005-08

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Postal: New Orleans, Louisiana 70148
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Related research
Keywords: Increasing returns; Indeterminacy; E-stability; Taylor principle;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. John Duffy & Wei Xiao, 2007. "Investment and Monetary Policy: Learning and Determinacy of Equilibrium," Working Papers 324, University of Pittsburgh, Department of Economics, revised Aug 2008. [Downloadable!]
  2. Sosunov, Kirill & Khramov, Vadim, 2008. "Monetary policy rules and indterminacy," MPRA Paper 11996, University Library of Munich, Germany. [Downloadable!]
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This page was last updated on 2009-11-19.

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