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Monetary policy rules and indterminacy


  • Sosunov, Kirill
  • Khramov, Vadim


In recent papers it is shown that in the presence of price stickiness, investment and capital accumulation activity, active monetary policy (MP) rules can lead to indeterminacy under various assumptions about the structure of the model. We analyze the conditions for real indeterminacy to occur in the model with capital accumulation. The key assumption is that we add response to output to the monetary policy rule. In our paper we show that adding Current or Expected Output to MP rule substantially changes the conditions for real indeterminacy to occur. In contrast to some existing research we show that under current-looking with respect to output MP rules indeterminacy is almost impossible; under forward-looking with respect to output MP rules indeterminacy is almost impossible under active MP rules and very likely to occur under passive MP rules. We also show that stability conditions are almost not sensitive to changes in capital share in output and aggregate markup. We provide the nominal determinacy analysis and show that active and forward-looking MP rules with respect to output give

Suggested Citation

  • Sosunov, Kirill & Khramov, Vadim, 2008. "Monetary policy rules and indterminacy," MPRA Paper 11996, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:11996

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    References listed on IDEAS

    1. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
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    3. Benhabib, Jess & Eusepi, Stefano, 2005. "The design of monetary and fiscal policy: A global perspective," Journal of Economic Theory, Elsevier, vol. 123(1), pages 40-73, July.
    4. Stephanie Schmitt-Grohe & Jess Benhabib & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March.
    5. Kurozumi, Takushi & Van Zandweghe, Willem, 2008. "Investment, interest rate policy, and equilibrium stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1489-1516, May.
    6. L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued) 33, Netherlands Central Bank.
    7. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    8. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 767-789, October.
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    10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    11. King, Robert G. & Wolman, Alexander L., 2004. "Monetary discretion, pricing complementarity and dynamic multiple equilibria," Working Paper Series 343, European Central Bank.
    12. Xiao, Wei, 2008. "Increasing Returns And The Design Of Interest Rate Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 12(01), pages 22-49, February.
    13. Huang, Kevin X.D. & Meng, Qinglai, 2007. "Capital and macroeconomic instability in a discrete-time model with forward-looking interest rate rules," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2802-2826, August.
    14. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
    15. Carlstrom, Charles T. & Fuerst, Timothy S., 2005. "Investment and interest rate policy: a discrete time analysis," Journal of Economic Theory, Elsevier, vol. 123(1), pages 4-20, July.
    16. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper 0009, Federal Reserve Bank of Cleveland.
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    Cited by:

    1. Vadim Khramov, 2012. "Assessing Dsge Models with Capital Accumulation and Indeterminacy," IMF Working Papers 12/83, International Monetary Fund.

    More about this item


    Macroeconomics; Monetary Econimics; Indeterminacy;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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