Labor Market Frictions, Indeterminacy, and Interest Rate Rules
This paper studies the emergence of indeterminate equilibria in a standard New Keynesian model characterized by labor market frictions, under a policy rule that reacts strictly to inflation. Given labor market frictions, monetary policy may not be able to prevent aggregate fluctuations from being driven solely by self-fulfilling expectations. This is not, though, a result that holds under all circumstances: a monetary policy that reacts to some average measures of inflation or to the output gap may guarantee determinacy in the economy.
Volume (Year): 38 (2006)
Issue (Month): 7 (October)
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