Increasing Returns and the Design of Interest Rate Rules
AbstractWe 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 InfoPaper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2005-08.
Length: 31 pages
Date of creation: Feb 2005
Date of revision:
Increasing returns; Indeterminacy; E-stability; Taylor principle;
Other versions of this item:
- Xiao, Wei, 2008. "Increasing Returns And The Design Of Interest Rate Rules," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 12(01), pages 22-49, February.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-06 (All new papers)
- NEP-CBA-2006-05-06 (Central Banking)
- NEP-MAC-2006-05-06 (Macroeconomics)
- NEP-MON-2006-05-06 (Monetary Economics)
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- AraÃºjo, Eurilton, 2008.
"Real Wage Rigidity and the Taylor Principle,"
Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa
wpe_112, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
- Sosunov, Kirill & Khramov, Vadim, 2008. "Monetary policy rules and indterminacy," MPRA Paper 11996, University Library of Munich, Germany.
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