Increasing Returns and the Design of Interest Rate Rules

Wei Xiao

No 2005-08, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of 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 "Taylor principle" no longer guarantees either determinacy or E-stability of the rational expectations equilibrium.

Keywords: Increasing returns; Indeterminacy; E-stability; Taylor principle (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2005-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: INCREASING RETURNS AND THE DESIGN OF INTEREST RATE RULES (2008)
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