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Increasing Returns and the Design of Interest Rate Rules

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  • 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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Bibliographic 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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Keywords: Increasing returns; Indeterminacy; E-stability; Taylor principle;

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Cited by:
  1. Araújo, Eurilton, 2008. "Real Wage Rigidity and the Taylor Principle," Insper Working Papers wpe_112, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  2. David Aadland & David Finnoff & Kevin x.d. Huang, 2013. "The Equilibrium Dynamics of Economic Epidemiology," Vanderbilt University Department of Economics Working Papers 13-00003, Vanderbilt University Department of Economics.
  3. Sosunov, Kirill & Khramov, Vadim, 2008. "Monetary policy rules and indterminacy," MPRA Paper 11996, University Library of Munich, Germany.

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