IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Optimal Monetary Policy with Endogenous Capital Accumulation

Listed author(s):
  • David Lopez-Salido
  • Andrew T. Levin

The previous literature on optimal monetary policy has focused mainly on dynamic stochastic general equilibrium models with a constant aggregate capital stock (cf. Woodford 1999; Erceg et al. 2000). In this paper, we analyze the monetary policy implications of endogenous capital accumulation. We augment the benchmark New Keynesian model to incorporate investment with quadratic adjustment costs, and use a perturbation algorithm to obtain the second-order approximation of the model around its steady state. Using these methods, we characterize the properties of the fully-optimal Ramsey policy under commitment, and compare the welfare implications of simple Taylor-style rules involving the inflation rate and the output gap. Simple rules in this class can be formulated in terms of two alternative definitions of potential output: the level that would prevail under flexible wages and prices, conditional on the current capital stock (as in Woodford 2003), or the level corresponding to a frictionless economy in which wages and prices had always been flexible (as in Nelson and Neiss 2003). Our analysis documents the relative performance of simple rules involving these definitions, and then considers the extent to which our findings are robust to various extensions of the baseline model, including variable capacity utilization, limited reallocation of capital across firms, and higher-order adjustment costs (as in Christiano, Eichenbaum and Evans 2001)

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 826.

in new window

Date of creation: 2004
Handle: RePEc:red:sed004:826
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed004:826. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.