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Investment, Interest Rate Rules, and Equilibrium Determinacy

  • Qinglai Meng
  • Chong K. Yip

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

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Paper provided by Chinese University of Hong Kong, Department of Economics in its series Departmental Working Papers with number _138.

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Date of creation: Jan 2002
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Handle: RePEc:chk:cuhked:_138
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