Published and unpublished papers by Wei Xiao

Investment and Monetary Policy: Learning and Determinacy of Equilibrium

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Jointly written with John Duffy (2011) (Download), Journal of Money, Credit, and Banking, 43 No. 5.

We examine determinancy and expectational stability (learnability) of rational expectations equilibrium (REE) in sticky price “New Keynesian” (NK) models of the monetary transmission mechanism. We consider three different New Keynesian models: a labor-only model and two models that add capital — one where capital is allocated in an economy-wide rental market and another that supposes that the demand for capital is firm-specific. We find that Bullard and Mitra’s (2002, 2006) findings on determinacy and learnability of REE under various interest rate rules in the labor-only NK model do not always extend to models with capital. In particular, the Taylor principle, that the response of interest rates should be more than proportionate to changes in inflation, will not generally suffice to guarantee determinate and/or learnable equilibria in NK models with capital.


Written by wxiao

January 21, 2009 at 7:47 pm

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