Optimal interest-rate rules and inflation stabilization versus price-level stabilization

This paper compares the properties of interest-rate rules such as simple Taylor rules and rules that respond to price-level fluctuations (called Wicksellian rules) in a basic forward-looking model. By introducing appropriate history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare, robustness to alternative shock processes, and are less prone to equilibrium indeterminacy. A simple Wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule, i.e., a monetary policy rule that implements the optimal plan and that is also completely robust to the specification of exogenous shock processes.     

Factor substitution and taxation in a finance constrained economy

In this paper, we examine the effects of constant-rate factor taxation on macroeconomic stability in the Woodford (1986) model. Our focus is on how the degree of factor substitution, as measured by the elasticity of factor substitution (EOS) in production, affects different balanced-budget tax rules. Analytically, we show that indeterminacy can occur under capital income taxation only when the EOS is very low, whereas indeterminacy under labor income taxation is not subject to the EOS restriction. This finding is robust when we tax all of the factor incomes with equal rates. Thus, in terms of macroeconomic stability, taxing capital income is preferred to taxing labor income.     

Indeterminacy problems and the interpretation of factor analysis results

Abstract  This paper reviews indeterminacy problems for the factor analysis model and their consequences for the interpretation of the results. Two types of indeterminacy are discerned: indeterminacy of the parameters in the model (the number of factors, the specific variances and the factorloadings) and the indeterminacy of the factors, given the parameters in the model. It is argued that parameter indeterminacy is partly to be overcome, provided that a strong underlying theory for the subject matter under research is present. Factor indeterminacy remains a major stumbling-block for the interpretation of results. The G uttman criterion is advocated as a measure of factor indeterminacy.     

Some comments on the possibility of “Methodological indeterminacy”

This article is an attempt to analyze the implications for research in the human sciences of the topic of “indeterminacy”. Reviewing an aspect of the issue from the philosophy of social science, the author argues that the debates at the philosophical level often overlook or underestimate the importance of methodological approaches. While the philosophical issue of indeterminacy remains a vexing problem in the social sciences since it was raised by Quine, the article argues that at least a partial resolution of the issue is possible if it is viewed within the context if differing methodological approaches.     

Learning about monetary policy rules when the cost-channel matters

We study how monetary policy may affect determinacy and expectational stability (E-stability) of rational expectations equilibrium when the cost channel of monetary policy matters. Focusing on instrumental Taylor-type rules and optimal target rules, we show that standard policies can induce indeterminacy and expectational instability when the cost channel is present. A naïve application of the traditional Taylor principle could be misleading, and expectations-based reaction function under discretion does not always induce determinate and E-stable equilibrium. This result contrasts with the findings of Bullard and Mitra [2002. Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129] and Evans and Honkapohja [2003. Expectations and stability problem for optimal monetary policies. Review of Economic Studies 70, 807–824] for the standard new Keynesian model. The ability of the central bank to commit to an optimal policy is an antidote to these problems.     

Relational consumption and nonlinear dynamics in an overlapping generations model

In this paper, we show that incorporating the relational dimension into an otherwise standard OLG model and focusing on dynamic leisure externalities leads to dramatically different predictions. Here, we show that when the old perceive private and relational consumption as substitutable goods, a series of interesting dynamic outcomes—such as local indeterminacy, nonlinear phenomena (including chaotic dynamics) and even multiple equilibria with global indeterminacy—may arise. We also draw some welfare implications and relate them to the well-known “happiness paradox” arising within contemporary affluent societies.     

Impatience and equilibrium indeterminacy

This paper extends the neoclassical one-sector optimal growth model by postulating that individual agents’ time preference (impatience) depends on the economy-wide average consumption and average income, which are social factors taken as external by individual agents. The paper shows that with the socially determined individual time preference local equilibrium indeterminacy can arise. Moreover, local indeterminacy can also be associated with global indeterminacy in many cases. The results hold in models with bounded and unbounded growth.     

Congestible public goods and local indeterminacy: A two-sector endogenous growth model

This paper shows that the congestible public goods can generate local indeterminacy in a two-sector, constant-return human capital enhanced growth model. While the productive public good exerts positive sector-specific externalities, the congestion effect generates negative aggregate externalities. The sector-specific externalities alone arising from productive public goods cannot establish local indeterminacy without the combination of negative externality in a model with social constant return technology. Congestible public good generates local indeterminacy if the degree of productive public good externality and the degree of congestion effect are large enough. The condition for indeterminacy is independent of the factor intensity rankings. The conditions are quantitatively assessed and the required parameter values for the degrees of public good externality and congestion are consistent with the estimated values in existing literature.     

Trade,redistribution and indeterminacy

In the present paper a tractable two-sector growth model with technological externalities and many countries is considered. It is shown that the occurrence of indeterminacy, a typical side-product of externalities, may appear due to the enlargement of the markets for goods and factors. Various scenarios of progressive levels of integration are considered. In particular, it is found that the integration into a common market on which countries trade the produced good and the inputs may lead to indeterminacy even when the equilibrium under full autarchy is determinate. A similar result holds when integration only affects consumption and capital goods. However, such result does not occur if the inverse of relative risk aversion is a linear or concave function. We conclude that in many usual situations, as the one with CES preferences, indeterminacy and the associated fragility of expectations and financial instability, is not likely to be increased by market integration.     

Capital–labor substitution and equilibrium indeterminacy

This paper examines the quantitative relationship between the elasticity of capital–labor substitution in production and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector growth model. With variable capital utilization, the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy. However, when capital utilization is constant, a below-unity substitution elasticity sharply raises the minimum degree of increasing returns because it imposes a higher effective adjustment cost on labor hours. Overall, our results show that empirically-plausible departures from the Cobb–Douglas production specification can make indeterminacy more difficult to achieve.     

铁路工程建设物资采购招标模式研究

介绍了目前我国招投标管理相关法律法规体系,铁路工程建设物资采购招标概况以及招标工作流程,同时探讨和分析了招投标制度中存在的问题,并对铁路工程建设单位现行物资采购招投标模式的进一步完善提出建议。     

Multiple equilibria in two-sector monetary economies: An interplay between preferences and the timing for money

In this paper, we study the occurrence of local indeterminacy in two-sector monetary economies. We consider a general MIUF model with two alternative timings in monetary payments: the Cash-In-Advance timing, in which the cash available to buy goods is money in the consumers’ hands after they leave the bond market but before they enter the goods market, and the Cash-After-the-Market timing, in which agents hold money for transactions after leaving the goods market. We consider three standard specifications of preferences: the additively separable formulation, the Greenwood–Hercovitz–Huffman (GHH) (Greenwood et al., 1988) formulation and the King–Plosser–Rebelo (KPR) (King et al., 1988) formulation. First, we show that for all the three types of preferences, local indeterminacy occurs under the CIA timing with a low enough interest rate elasticity of money demand. Second, we show that with the CAM timing, although determinacy always holds under separable preferences, local indeterminacy can occur with GHH and KPR preferences. We thus prove that compared to aggregate models, two-sector models provide new rooms for local indeterminacy when non-separable standard preferences are considered.     

Trend inflation,sticky prices,and expectational stability

Micro evidence indicates that each period a fraction of prices is kept unchanged under a positive trend inflation rate. In a sticky price model based on this evidence, recent research shows that high trend inflation is a serious cause for indeterminacy of rational expectations equilibrium under the Taylor rule. This paper examines implications of trend inflation for expectational stability of the equilibrium. An empirically plausible calibration of the model demonstrates that a fundamental rational expectations equilibrium is likely to be expectationally stable even in cases of indeterminacy induced by high trend inflation.     

Linear production function,externalities and indeterminacy in a capital-resource growth model

This paper investigates the equilibrium growth dynamics of an economy whose production is based on natural resources and which seeks to maximize welfare to the local community. This involves determining the optimal trajectories of consumption in the local area and the use of the environmental resource. Economic dynamics are affected by negative environmental externalities which are explicitly included as unfavourable effects in a linear production function. The analysis shows the existence of local and global indeterminacy.     

Chaos and sector-specific externalities

Benhabib and Farmer [1996. Indeterminacy and sector specific externalities. Journal of Monetary Economics 37, 397–419] explore the possibility of local indeterminacy in a two-sector model with sector-specific externalities. They find that very small sector-specific externalities are sufficient for local indeterminacy. In this case, it is possible to construct sunspot equilibria where extrinsic uncertainty matters. In this paper, I provide a global analysis of their model revealing the existence of Euler equation branching. This branching allows for regime switching equilibria with cycles and chaotic behavior. These equilibria occur whether the “local dynamics” are determinate or indeterminate.     

Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from A Robust Test

We propose a novel identification‐robust test for the null hypothesis that an estimated New Keynesian model has a reduced form consistent with the unique stable solution against the alternative of sunspot‐driven multiple equilibria. Our strategy is designed to handle identification failures as well as the misspecification of the relevant propagation mechanisms. We invert a likelihood ratio test for the cross‐equation restrictions (CER) that the New Keynesian system places on its reduced‐form solution under determinacy. If the CER are not rejected, sunspot‐driven expectations can be ruled out from the model equilibrium and we accept the structural model. Otherwise, we move to a second‐step and invert an Anderson and Rubin‐type test for the orthogonality restrictions (OR) implied by the system of structural Euler equations. The hypothesis of indeterminacy and the structural model are accepted if the OR are not rejected. We investigate the finite‐sample performance of the suggested identification‐robust two‐step testing strategy by some Monte Carlo experiments and then apply it to a New Keynesian AD/AS model estimated with actual US data. In spite of some evidence of weak identification as for the ‘Great Moderation’ period, our results offer formal support to the hypothesis of a switch from indeterminacy to a scenario consistent with uniqueness occurring in the late 1970s. Our identification‐robust full‐information confidence set for the structural parameters computed on the ‘Great Moderation’ regime turns out to be more precise than the intervals previously reported in the literature through ‘limited‐information’ methods. Copyright © 2014 John Wiley & Sons, Ltd.     

Myopia and monetary equilibria

In an infinitely lived, representative individual economy, important properties of competitive equilibria, such as determinacy and the non-existence of monetary equilibria, are not robust to the introduction of myopia. An individual is myopic if, at each date, he plans consumption only for that date and few periods that immediately follow; that is, his planning horizon, n, is finite. Equilibria with myopia can display real indeterminacy and allow for monetary as well as non-monetary steady states; thus, they share some of the features of equilibria in economies of overlapping generation. The equilibrium price dynamics (but not the consumption dynamics) of an exchange economy with extreme myopia, n = 1, are identical to the dynamics of an overlapping generation economy with two-period lives.     

Determinacy,indeterminacy and dynamic misspecification in linear rational expectations models

This paper proposes a testing strategy for the null hypothesis that a multivariate linear rational expectations (LRE) model may have a unique stable solution (determinacy) against the alternative of multiple stable solutions (indeterminacy). The testing problem is addressed by a misspecification-type approach in which the overidentifying restrictions test obtained from the estimation of the system of Euler equations of the LRE model through the generalized method of moments is combined with a likelihood-based test for the cross-equation restrictions that the model places on its reduced form solution under determinacy. The resulting test has no power against a particular class of indeterminate equilibria, hence the non rejection of the null hypothesis can not be interpreted conclusively as evidence of determinacy. On the other hand, this test (i) circumvents the nonstandard inferential problem generated by the presence of the auxiliary parameters that appear under indeterminacy and that are not identifiable under determinacy, (ii) does not involve inequality parametric restrictions and hence the use of nonstandard inference, (iii) is consistent against the dynamic misspecification of the LRE model, and (iv) is computationally simple. Monte Carlo simulations show that the suggested testing strategy delivers reasonable size coverage and power against dynamic misspecification in finite samples. An empirical illustration focuses on the determinacy/indeterminacy of a New Keynesian monetary business cycle model of the US economy.     

Poverty traps, the money growth rule, and the stage of financial development

This paper investigates how monetary policy influences the emergence of local indeterminacy, local bifurcations, and multiple steady states, depending upon the degree of the commitment parameter that defines financial market imperfection, using Diamond's overlapping generations model with credit market frictions. The analytical results will show that poverty traps happen as an inevitable outcome under a wider range of money growth rates, because financial markets are less developed. Put differently, we derive analytically the positive link between financial development and per capita income.     

The Taylor principle fights back,Part II

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.