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Determinacy and expectational stability of equilibrium in a monetary sticky-price model with Taylor rule

  • Kurozumi, Takushi

Recent studies show that the Taylor rule possesses desirable properties in terms of generating determinacy and E-stability of rational expectations equilibria under sticky prices. This paper examines whether this policy rule retains these properties within a discrete-time money-in-utility-function model, employing three timings of money balances of the utility function that the existing literature contains: end-of-period timing and two types of cash-in-advance timing. This paper shows: (i) Even a small degree of non-separability of the utility function between consumption and real balances causes the Taylor rule to be much more likely to induce indeterminacy or E-instability if this rule responds not only to inflation but also to output or the output gap; (ii) Differences among the three timings strongly alter conditions for the Taylor rule to ensure both determinacy and E-stability.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 53 (2006)
Issue (Month): 4 (May)
Pages: 827-846

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Handle: RePEc:eee:moneco:v:53:y:2006:i:4:p:827-846
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