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.
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.
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