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Firm-specific capital, nominal rigidities, and the Taylor principle

Author

Listed:
  • Tommy Sveen

    (Norges Bank (Central Bank of Norway))

  • Lutz Weinke

    (Duke University)

Abstract

In the presence of firm-specific capital the Taylor principle can generate multiple equilibria. Sveen and Weinke (2005b) obtain that result in the context of a Calvo-tyle sticky price model. One potential criticism is that the price stickiness which is needed for our theoretical result to be relevant from a practical point of view is somewhat to the high part of available empirical estimates. In the present paper we show that if nominal wages are not fully flexible (which is an uncontroversial empirical fact) then the Taylor principle fails already for some minor degree of price stickiness. We use our model to explain the consequences of both nominal rigidities for the desirability of alternative interest rate rules.

Suggested Citation

  • Tommy Sveen & Lutz Weinke, 2006. "Firm-specific capital, nominal rigidities, and the Taylor principle," Working Paper 2006/06, Norges Bank.
    • Handle: RePEc:bno:worpap:2006_06
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    References listed on IDEAS

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    More about this item

    Keywords

    Nominal Rigidities; Aggregate Investment; Monetary Policy.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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