THE COST CHANNEL OF MONETARY POLICY AND INDETERMINACY

Paolo Surico

Macroeconomic Dynamics, 2008, vol. 12, issue 5, 724-735

Abstract: We study the conditions that guarantee equilibrium determinacy in a standard sticky price model augmented with a cost channel. A central bank that assigns some positive weight to the output gap in its reaction function makes the economy more prone to multiple equilibria relative to the standard case. The value of the threshold on the interest rate response to inflation is above one and depends on the fraction of firms that need to borrow their bills payment.

Date: 2008
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