Monetary policy and multiple equilibria with constrained investment and externalities |
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Authors: | Baruch Gliksberg |
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Institution: | (1) Department of Economics, University of Rome Tor Vergata, Via Columbia 2, 00133 Rome, Italy |
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Abstract: | This paper focuses on two mechanisms under which interest-rate feed-back rules induce local indeterminacy in a closed economy
with capital accumulation: arbitrage activity and the pricing channel. It shows that constrained investment, in the sense
that it requires liquidity or that adjustment to the stock of capital is costly, is enough to induce indeterminacy if monetary
policy follows a strictly passive interest rate rule. Determinacy of equilibrium is ensured under an active monetary policy
stance. These results change when production externalities are introduced into the model so as to mimic the pricing channel
in New Keynesian models. In this case, a policy stance that ensures determinacy is either active or strictly passive. In view
of the contradicting results for the passive stance and the similar results for the active stance it is recommended that central
banks act according to the active stance. |
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Keywords: | |
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