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Firm-Specific Investment, Sticky Prices, and the Taylor Principle

  • Tommy Sveen

    ()

    (Norges Bank)

  • Lutz Weinke

    ()

    (Universitat Pompeu Fabra)

According to the Taylor principle a central bank should adjust the nominal interest rate by more than one for one in response to changes in current in?ation. Most of the existing literature supports the view that by following this simple recommendation a central bank can avoid being a source of unnecessary ?uctuations in economic activity. The present paper shows that this conclusion is not robust with respect to the modelling of capital accumulation. We use our insights to discuss the desirability of alternative arrangements for the conduct of monetary policy.

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Paper provided by Norges Bank in its series Working Paper with number 2004/12.

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Length: 23 pages
Date of creation: 10 Sep 2004
Date of revision:
Handle: RePEc:bno:worpap:2004_12
Note: Forthcoming in Journal of Economic Theory
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  10. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
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  12. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
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  18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  19. Bill Dupor, 2000. "Investment and Interest Rate Policy," Econometric Society World Congress 2000 Contributed Papers 0007, Econometric Society.
  20. Tommy Sveen & Lutz Weinke, 2004. "Pitfalls in the modeling of forward-looking price setting and investment decisions," Economics Working Papers 773, Department of Economics and Business, Universitat Pompeu Fabra.
  21. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  22. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  23. Tommy Sveen & Lutz Weinke, 2004. "New Perspectives on Capital and Sticky Prices," Working Paper 2004/03, Norges Bank.
  24. Baudry, L. & Le Bihan, H. & Sevestre, P. & Tarrieu, S., 2004. "Price Rigidity. Evidence from the French CPI Macro-Data," Working papers 113, Banque de France.
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