Determinacy of Equilibrium in a New Keynesian Model with Monetary Policy Lag

Abstract

Abstract:We use the New Keynesian continuous-time framework to theoretically investigate the effects of a lag in a central bank's response to economic fluctuations (i.e., monetary policy lag) on local equilibrium determinacy. In the case of a policy without lag, equilibrium is indeterminate even though a central bank's policy response is sufficiently active. However, in the case of a policy with lag, an active monetary policy can contribute to local equilibrium determinacy if the lag is modest.

Monetary and Fiscal Regimes Policy Rules in a Discrete Time Model

“…However, clearly both papers do not include a fiscal policy in their analysis while in this paper we investigate both monetary and fiscal policies. Most recently, Tsuzuki (2014;2015) and Tsuzuki (2016) examine the effect of policy lag on determinacy of equilibrium under continuous time framework for monetary and fiscal respectively. The results show that the length of policy lag play an important role in determining equilibrium determinacy.…”