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A Proof of Determinacy in the New-Keynesian Sticky Wages and Prices Model

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  • Franke, Reiner
  • Flaschel, Peter

Abstract

The paper is concerned with determinacy in a version of the New-Keynesian model that integrates imperfect competition and nominal price and wage setting on goods and labour markets. The model is reformulated with an explicit period of arbitrary length and shown to remain well-defined as the period shrinks to zero. The 4×4 constituent matrix of the model?s continuous-time counterpart is mathematically tractable and its determinacy results carry over to the period model at least if the period is sufficiently short. This being understood, it is proved that determinacy is (essentially) ensured if an extended Taylor principle requirement is met. --

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Bibliographic Info

Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2008,14.

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Date of creation: 2008
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Handle: RePEc:zbw:cauewp:7367

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Keywords: Determinacy; New-Keynesian wage and price Phillips curves; variable period length; continuous-time limit; Taylor principle;

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  1. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999, Society for Computational Economics 1151, Society for Computational Economics.
  2. Foley, Duncan K, 1975. "On Two Specifications of Asset Equilibrium in Macroeconomic Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 303-24, April.
  3. Edge, Rochelle M. & Rudd, Jeremy B., 2007. "Taxation and the Taylor principle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2554-2567, November.
  4. Rochelle M. Edge & Jeremy B. Rudd, 2002. "Taxation and the Taylor principle," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-51, Board of Governors of the Federal Reserve System (U.S.).
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