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Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment

Huang, Kevin X. D., Meng, Qinglai and Xue, Jianpo 2009, Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment, Journal of economic dynamics and control, vol. 33, no. 2, pp. 409-430, doi: 10.1016/j.jedc.2008.05.009.

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Title Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment
Author(s) Huang, Kevin X. D.
Meng, Qinglai
Xue, Jianpo
Journal name Journal of economic dynamics and control
Volume number 33
Issue number 2
Start page 409
End page 430
Total pages 22
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2009-02
ISSN 0165-1889
Keyword(s) Forward-looking inflation targeting
Current output
Endogenous investment
Nominal rigidities
Firm-specific capital
Summary We show that, with endogenous investment, virtually all monetary policy rules that set a nominal interest rate in response solely to expected future inflation induce real indeterminacy in models with (i) staggered prices, (ii) staggered prices and staggered wages, and (iii) staggered prices, staggered wages, and firm-specific capital. In (i), policy's response to current output can help significantly in ensuring determinacy with an infinite labor supply elasticity, but little with empirically plausible labor supply elasticity. In (ii), responding to output always helps a great deal, though under low price stickiness and without capital adjustment cost it may call for a moderate response to output in order to ensure determinacy for a wide range of response to inflation. In (iii), even a tiny response to output can always render equilibrium determinate for a wide range of response to inflation.
Language eng
DOI 10.1016/j.jedc.2008.05.009
Field of Research 140199 Economic Theory not elsewhere classified
1402 Applied Economics
1401 Economic Theory
1502 Banking, Finance And Investment
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 ©2008, Elsevier B.V.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30083627

Document type: Journal Article
Collection: Department of Economics
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