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On interest rate policy and equilibrium stability under increasing returns: a note

Huang, Kevin X.D. and Meng, Qinglai 2009, On interest rate policy and equilibrium stability under increasing returns: a note, Macroeconomic dynamics, vol. 13, no. 4, pp. 535-552, doi: 10.1017/S1365100509080195.

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Title On interest rate policy and equilibrium stability under increasing returns: a note
Author(s) Huang, Kevin X.D.
Meng, Qinglai
Journal name Macroeconomic dynamics
Volume number 13
Issue number 4
Start page 535
End page 552
Total pages 18
Publisher Cambridge University Press
Place of publication Cambridge, Eng.
Publication date 2009-09
ISSN 1365-1005
1469-8056
Keyword(s) Increasing Returns
Indeterminacy
E-stability
Taylor Principle
Summary Bullard and Mitra [Journal of Monetary Economics 49 (2002), 11051130] find that, in a New Keynesian economy without capital and under four variants of the Taylor rule, the Taylor principle is sufficient to guarantee both determinacy and E-stability of equilibrium in most cases. Xiao [Macroeconomic Dynamics 12 (2008), 2249] claims that with capital and mild increasing returns the Taylor principle cannot guarantee either determinacy or E-stability with any of the four rules. In this paper we show that in the Calvo-type sticky price models a second-order condition for profit maximization must be satisfied in firms' pricing decision problem, and we point out that the examples given in Xiao's paper to support his conclusion violate this condition. After imposing this condition, we find that increasing returns have little effect on determinacy and E-stability under two of the policy rules but significant effects under the other two. These results are obtained in models both with and without capital.
Language eng
DOI 10.1017/S1365100509080195
Field of Research 140199 Economic Theory not elsewhere classified
1401 Economic Theory
Socio Economic Objective 970114 Expanding Knowledge in Economics
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2009, Cambridge University Press
Persistent URL http://hdl.handle.net/10536/DRO/DU:30083625

Document type: Journal Article
Collection: Department of Economics
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