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INCREASING RETURNS AND THE DESIGN OF INTEREST RATE RULES

Published online by Cambridge University Press:  01 October 2007

WEI XIAO
WEI XIAO
Affiliation:
State University of New York at Binghamton
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Abstract

We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of equilibrium under 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 ReturnsIndeterminacyE-StabilityTaylor Principle
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Issue 1 , February 2008 , pp. 22 - 49
Copyright
© 2007 Cambridge University Press

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