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Stability Analysis in a Monetary Model With a Varying Intertemporal Elasticity of Substitution

Orlando Gomes ()

The IUP Journal of Monetary Economics, 2009, vol. VII, issue 2, 32-41

Abstract: Models dealing with monetary policy are generally based on microfoundations that characterize the behavior of representative agents (households and firms). To explain the representative consumer behavior, it generally assumes a utility function in which the intertemporal elasticity of substitution is constant. Recent literature casts some doubts about the relevance of considering such a constant elasticity value. In this paper, the new Keynesian monetary policy model is explored under the assumption that the elasticity of substitution changes with expectations regarding real economic performance. As a result, one observes that some combinations of parameter values allow for a stable fixed point outcome, while other combinations of parameters are compatible with cycles of various periodicities and even aperiodic fluctuations.

Date: 2009
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Working Paper: Stability analysis in a monetary model with a varying intertemporal elasticity of substitution (2007) Downloads
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