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Trend inflation and Monetary policy rules: Determinacy analyses in New Keynesian model with capital accumulation

  • Elena, Gerko
  • Kirill, Sossounov

The eects of positive trend inflation is analyzed in the framework of the standard New-Keynesian model with Calvo price setting and capital accumulation. It is build on the work of Duport (2001) and Ascari and Ropele (2007) who separately considered eects of capital accumulation and trend inflation in the similar context. It is shown that the simultaneous presence of positive inflation and capital accumulation greatly aects determinacy property of equilibrium in this setup. Namely, in order to maintain stability in addition to actively react to inflation monetary authorities should react to output uctuations but not to a great extend. Overreaction to output may lead to indeterminacy. We also show that for a large set of plausible parameters standard Taylor rule leads to indeterminacy. Alternative monetary policy rules are also analyzed.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30551.

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Date of creation: 11 Jan 2011
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Handle: RePEc:pra:mprapa:30551
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  1. Ascari, Guido, 2003. "Staggered prices and trend inflation: some nuisances," Research Discussion Papers 27/2003, Bank of Finland.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  3. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  6. Ascari, Guido & Ropele, Tiziano, 2007. "Optimal monetary policy under low trend inflation," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2568-2583, November.
  7. Guido Ascari & Tiziano Ropele, 2007. "Trend Inflation, Taylor Principle and Indeterminacy," Kiel Working Papers 1332, Kiel Institute for the World Economy.
  8. Yuriy Gorodnichenko & Olivier Coibion, 2009. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," 2009 Meeting Papers 21, Society for Economic Dynamics.
  9. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  10. 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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