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Stability Analysis in a Monetary Model With a Varying Intertemporal Elasticity of Substitution

  • Orlando Gomes

Models dealing with monetary policy are generally based on microfoundations that characterize the behavior of representative agents (households and firms). To explain the representative consumer behavior, it generally assumes a utility function in which the intertemporal elasticity of substitution is constant. Recent literature casts some doubts about the relevance of considering such a constant elasticity value. In this paper, the new Keynesian monetary policy model is explored under the assumption that the elasticity of substitution changes with expectations regarding real economic performance. As a result, one observes that some combinations of parameter values allow for a stable fixed point outcome, while other combinations of parameters are compatible with cycles of various periodicities and even aperiodic fluctuations.

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Article provided by IUP Publications in its journal The IUP Journal of Monetary Economics.

Volume (Year): VII (2009)
Issue (Month): 2 (May)
Pages: 32-41

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Handle: RePEc:icf:icfjmo:v:07:y:2009:i:2:p:32-41
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  1. Ogaki, M. & Atkeson, A., 1993. "The Rate of Time Preference, The Intertemporal Elasticity of Substitution, and the leval of Wealth," RCER Working Papers 363, University of Rochester - Center for Economic Research (RCER).
  2. Beaudry, Paul & van Wincoop, Eric, 1996. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol. 63(251), pages 495-512, August.
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  8. Orazio P. Attanasio & Martin Browning, 1993. "Consumption over the Life Cycle and over the Business Cycle," NBER Working Papers 4453, National Bureau of Economic Research, Inc.
  9. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
  10. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  11. Atkeson, A. & Ogaki, M., 1991. "Wealth-Varying Intertemporal Elasticities of Substitution Evidence from Panel and Aggregate Data," RCER Working Papers 303, University of Rochester - Center for Economic Research (RCER).
  12. M. Fatih Guvenen, 2002. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," RCER Working Papers 491, University of Rochester - Center for Economic Research (RCER), revised Mar 2003.
  13. Kazuo Nishimura & Tadashi Shigoka & Makoto Yano, 1998. "Interior Optimal Chaos with Arbitrarily Low Discount Rates," The Japanese Economic Review, Japanese Economic Association, vol. 49(3), pages 223-233, 09.
  14. Christopher Bliss, 2004. "Some Implications of a Variable EIS," Economics Papers 2004-W26, Economics Group, Nuffield College, University of Oxford.
  15. María J. Álvarez & Antonia Díaz, 2001. "Minimum Consumption And Transitional Dynamics In Wealth Distribution," Economics Working Papers we015013, Universidad Carlos III, Departamento de Economía.
  16. repec:fth:harver:1435 is not listed on IDEAS
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