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Investment, interest rate rules, and equilibrium determinacy

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  • Qinglai Meng
  • Chong Yip

Abstract

By adding endogenous investment to a flexible-price, money-in-the-utility-function model, this paper studies the role that physical capital plays in stabilizing the real side of the economy when the monetary authority follows interest-rate feedback rules. We show that with inelastic labor supply equilibrium uniqueness is ensured under both active and passive monetary policies. For the case where money affects both preferences and technology, the uniqueness result remains true under active monetary policy. With endogenous labor supply, the uniqueness result holds again regardless of the stance of monetary policies for the case with separable leisure, but indeterminacy remains likely under both active and passive monetary policies when leisure is nonseparable. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Qinglai Meng & Chong Yip, 2004. "Investment, interest rate rules, and equilibrium determinacy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(4), pages 863-878, May.
    • Handle: RePEc:spr:joecth:v:23:y:2004:i:4:p:863-878
    DOI: 10.1007/s00199-003-0401-4
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