INCREASING RETURNS AND THE DESIGN OF INTEREST RATE RULES
Wei Xiao ()
Macroeconomic Dynamics, 2008, vol. 12, issue 1, 22-49
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 â€œTaylor principleâ€ no longer guarantees either determinacy or E-stability of the rational expectations equilibrium.
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Working Paper: Increasing Returns and the Design of Interest Rate Rules (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:12:y:2008:i:01:p:22-49_06
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