Determinacy of Equilibrium in a New Keynesian Model with Monetary Policy Lag
International Journal of Economic Behavior and Organization
Volume 3, Issue 2-1, April 2015, Pages: 15-22
Received: Dec. 11, 2014; Accepted: Jan. 12, 2015; Published: Jan. 22, 2015
Views 2981      Downloads 211
Author
Eiji Tsuzuki, Faculty of Economics, Chiba Keizai University, Chiba, Japan
Article Tools
Follow on us
Abstract
We use the New Keynesian continuous-time framework to theoretically investigate the effects of a lag in a central bank’s response to economic fluctuations (i.e., monetary policy lag) on local equilibrium determinacy. In the case of a policy without lag, equilibrium is indeterminate even though a central bank’s policy response is sufficiently active. However, in the case of a policy with lag, an active monetary policy can contribute to local equilibrium determinacy if the lag is modest.
Keywords
Money in the Production Function (MIPF) Model, Policy Lag, System of Delay Differential Equations, Monetary Policy Rule, Taylor Principle
To cite this article
Eiji Tsuzuki, Determinacy of Equilibrium in a New Keynesian Model with Monetary Policy Lag, International Journal of Economic Behavior and Organization. Special Issue: Recent Developments of Economic Theory and Its Applications. Vol. 3, No. 2-1, 2015, pp. 15-22. doi: 10.11648/j.ijebo.s.2015030201.14
References
[1]
T. Asada and H. Yoshida, “Stability, instability and complex behavior in macrodynamic models with policy lag,” Discrete Dynamics in Nature and Society, vol. 5(4), pp.281–295, 2001.
[2]
R. E. Bellman and K. L. Cooke, Differential-Difference Equations, Academic Press, New York, 1963.
[3]
J. Benhabib, S. Schmitt-Grohé, and M. Uribe, “Monetary policy and multiple equilibria,” American Economic Review, vol. 91(1), pp.167–186, 2001.
[4]
J. Benhabib, S. Schmitt-Grohé, and M. Uribe, “Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability,” Journal of Money, Credit and Banking, vol. 35(6), pp.1379–1412, 2003.
[5]
B. S. Bernanke and M. Woodford, “Inflation forecasts and monetary policy,” Journal of Money, Credit and Banking, vol. 29(4), pp.653–684, 1997.
[6]
F. O. Bilbiie, “Limited asset markets participation, monetary policy and (inverted) aggregate demand logic,” Journal of Economic Theory, vol. 140(1), pp.162–196, 2008.
[7]
O. J. Blanchard and N. Kiyotaki, “Monopolistic competition and the effects of aggregate demand,” American Economic Review, vol. 77(4), pp.647–666, 1987.
[8]
E. F. Buffie, “The Taylor principle fights back, part I,” Journal of Economic Dynamics and Control, vol. 37, pp.2771–2795, 2013.
[9]
C. T. Carlstrom and T. S. Fuerst, “Forward-looking versus backward-looking Taylor rules,” FRB Cleveland, no. 0009, 2000.
[10]
C. T. Carlstrom and T. S. Fuerst, “Comment on “Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability” by Jess Benhabib,” Journal of Money, Credit and Banking, vol. 35(6), pp.1413–1423, 2003.
[11]
C. T. Carlstrom and T. S. Fuerst, “Asset prices, nominal rigidities, and monetary policy,” Review of Economic Dynamics, vol. 10(2), pp.256–275, 2007.
[12]
A. K. Dixit and J. E. Stiglitz, “Monopolistic competition and optimum product diversity,” American Economic Review, vol. 67(3), pp.297–308, 1977.
[13]
R. C. Feenstra, “Functional equivalence between liquidity costs and the utility of money,” Journal of Monetary Economics, vol. 17(2), pp.271–291, 1986.
[14]
M. Friedman, “A monetary and fiscal framework for economic stability,” American Economic Review, vol. 38(3), pp.245–264, 1948.
[15]
J. Galí, Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press, 2008.
[16]
G. Gandolfo, Economic Dynamics, 4th ed., Springer-Verlag, 2010.
[17]
A. Matsumoto and F. Szidarovszky, “An elementary study of a class of dynamic systems with two time delays,” Cubo (Temuco), vol. 14(3), pp.103–113, 2012.
[18]
J. J. Rotemberg, “Sticky prices in the United States,” Journal of Political Economy, vol. 90(6), pp.1187–1211, 1982.
[19]
J. B. Taylor, “Discretion versus policy rules in practice,” Carnegie-Rochester Conference Series on Public Policy, vol. 39, pp.195–214, North-Holland, 1993.
[20]
E. Tsuzuki, “Unimodality of a weight function in backward-looking interest-rate rules and determinacy of equilibrium,” Keizaironsyu, vol. 100, pp.147–171, The Economics Society, Daito Bunka University, 2013.
[21]
E. Tsuzuki, “A New Keynesian model with delay: Monetary policy lag and determinacy of equilibrium,” Economic Analysis and Policy, vol. 44(3), pp.279–291, 2014.
[22]
E. Tsuzuki and T. Inoue, “Technological change and monetary policy in a sticky-price model,” Research in Economics, vol. 65(3), pp.180–194, 2011.
[23]
C. E. Walsh, Monetary Theory and Policy, 3rd ed., MIT Press, 2010.
[24]
M. Woodford, Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, 2003.
[25]
H. Yoshida and T. Asada, “Dynamic analysis of policy lag in a Keynes–Goodwin model: Stability, instability, cycles and chaos,” Journal of Economic Behavior and Organization, vol. 62(3), pp.441–469, 2007.
ADDRESS
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
U.S.A.
Tel: (001)347-983-5186