Published and unpublished papers by Wei Xiao

Policy Inertia and Equilibrium Determinacy in a New Keynesian Model with Investment

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Working paper (Download).

Carlstrom and Fuerst (2005) demonstrate that when investment is added to a new Keynesian model, forward-looking interest rate rules almost always lead to equilibrium indeterminacy, even when the central bank responds strongly to expected in.ation. In this paper, we show that equilibrium determinacy can be retained with forward-looking rules, as long as there is policy inertia. Strong response to expected in.ation is still essential in guaranteeing macroeconomic stability.


Written by wxiao

January 21, 2009 at 7:44 pm

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