 The Taylor principle fights back, Part IIEdward F. Buffie Journal of Economic Dynamics and Control, 2014, vol. 46, issue C, 30-49 Abstract: The existing literature holds that the Taylor principle often leads to indeterminacy in New Keynesian models that allow for capital accumulation and limited asset market participation. This conclusion is special, however, to the case of continuous full employment. When the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously, determinacy is the norm. The threat of indeterminacy is limited to a tiny, irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast. Everywhere else, the Taylor principle guarantees a unique rational expectations equilibrium. The dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market. Keywords: Inflation; Taylor principle; Indeterminacy; Limited asset market participation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:46:y:2014:i:c:p:30-49 DOI: 10.1016/j.jedc.2014.05.016 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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