Published and unpublished papers by Wei Xiao

Increasing Returns and the Design of Interest Rate Rules

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Published in Macroeconomic Dynamics (2008), vol. 12, No. 1. (Download working paper version).

We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of equilibrium under Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the Taylor principle no longer guarantees either determinacy or E-stability of the rational expectations equilibrium. 


Written by wxiao

January 21, 2009 at 7:31 pm

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