Investment, interest rate policy, and equilibrium stability

Kurozumi, Takushi; Zandweghe, Willem Van

doi:10.1016/j.jedc.2007.06.006

Cited by 40 publications

(65 citation statements)

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“…We set Z to 10, corresponding to an intertemporal hours-worked elasticity of 10 percent, which lies in the middle of many empirical estimates based on microdata (e.g., Pencavel, 1986;Altonji, 1986;Ball, 1990;Card, 1994) and values used in many theoretical studies (e.g., Ball and Romer, 1990;Reis, 2006). As a contrast, we also examine the case with Z ¼ 0, corresponding to an infinite labor supply elasticity, as is assumed in many studies on indeterminacy (e.g., Carlstrom and Fuerst, 2005;Benhabib and Eusepi, 2005;Kurozumi and Zandweghe, 2008).…”

Section: A Model With Staggered Pricesmentioning

confidence: 99%

“…While Carlstrom and Fuerst (2005) suggest that such a policy is unlikely to help mitigate the indeterminacy problem in the standard models with staggered prices, Kurozumi and Zandweghe (2008) and Huang and Meng (2007b) find otherwise with an infinite elasticity of labor supply. 11 Here we find that, with a finite, empirically plausible labor supply elasticity, policy's response to current output helps little in ensuring determinacy.…”

Section: Introductionmentioning

confidence: 99%

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Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment

Huang

Meng

Xue

2009

Journal of Economic Dynamics and Control

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a b s t r a c tWe show that, with endogenous investment, virtually all monetary policy rules that set a nominal interest rate in response solely to expected future inflation induce real indeterminacy in models with (i) staggered prices, (ii) staggered prices and staggered wages, and (iii) staggered prices, staggered wages, and firm-specific capital. In (i), policy's response to current output can help significantly in ensuring determinacy with an infinite labor supply elasticity, but little with empirically plausible labor supply elasticity. In (ii), responding to output always helps a great deal, though under low price stickiness and without capital adjustment cost it may call for a moderate response to output in order to ensure determinacy for a wide range of response to inflation. In (iii), even a tiny response to output can always render equilibrium determinate for a wide range of response to inflation.

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Section: A Model With Staggered Pricesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment

Huang

Meng

Xue

2009

Journal of Economic Dynamics and Control

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“…Various authors have examined similar issues in different or more extended models, e.g. Kurozumi (2006), Llosa and Tuesta (2007), Kurozumi and Van Zandweghe (2007), Duffy and Xiao (2007) and Pfajfar and Santaro (2007), Branch, Carlson, Evans and McGough (2006a,b Molnar and Santoro (2007). Section 4 discusses the implications of adaptive learning for optimal monetary policy in the baseline model.…”

Section: Introductionmentioning

confidence: 99%

Inflation Expectations, Adaptive Learning and Optimal Monetary Policy

Gaspar

Smets

Vestin

2010

Handbook of Monetary Economics

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This chapter investigates the implications of adaptive learning in the private sector's formation of inflation expectations for the conduct of monetary policy. We analyze the determinants of optimal monetary policy in the standard New Keynesian model, when the central bank minimizes an explicit loss function and has full information about the structure of the economy, including the precise mechanism generating private sector's expectations. The focus on optimal policy allows us to investigate how and to what extent a change in the assumption of how agents form their inflation expectations affects the principles of optimal monetary policy. It also provides a benchmark to evaluate simple policy rules. We find that departures from rational expectations increase the potential for instability in the economy, thereby strengthening the importance of managing (anchoring) inflation expectations. We also find that the simple commitment rule under rational expectations is robust when expectations are formed in line with adaptive learning.

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“…the lower the separation rate and the steady state job …nding rate x for a given level of employment. 11 Assume for instance, for the sake of example, that we have N = 0:9 and, unrealistically x = 0:9; implying a separation rate of = 1: In this case, we have h L = h F = 0: In this scenario, all worker are …red at the beginning of the period. This implies that hiring and hence the cost of hiring depend only on N t and that the cost of hiring in the future is irrelevant for job creation today because no job lasts longer than one period anyway.…”

Section: Marginal Cost and Phillips Curve The Absence Of Skill Lossmentioning

confidence: 99%

The Taylor Principle and (In-)Determinacy in a New Keynesian Model with Hiring Frictions and Skill Loss

Rannenberg

2010

SSRN Journal

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We introduce duration dependent skill decay among the unemployed into a NewKeynesian model with hiring frictions developed by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) in ‡ation and quarterly skill decay is above a threshold level, determinacy requires a coe¢ cient on in ‡a-tion smaller than one. The threshold level is plausible with little steady-state hiring and …ring ("Continental European Calibration") but implausibly high in the opposite case ("American calibration"). Neither interest rate smoothing nor responding to the output gap helps to restore determinacy if skill decay exceeds the threshold level. However, a modest response to unemployment guarantees determinacy.Moreover, under indeterminacy, both an adverse sunspot shock and an adverse technology shock increase unemployment extremely persistently.

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Investment, interest rate policy, and equilibrium stability

Cited by 40 publications

References 40 publications

Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment

Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment

Inflation Expectations, Adaptive Learning and Optimal Monetary Policy

The Taylor Principle and (In-)Determinacy in a New Keynesian Model with Hiring Frictions and Skill Loss

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