Hostname: page-component-8448b6f56d-qsmjn Total loading time: 0 Render date: 2024-04-18T07:41:10.830Z Has data issue: false hasContentIssue false
  • English
  • Français

INVESTMENT AND FORWARD-LOOKING MONETARY POLICY: A WICKSELLIAN SOLUTION TO THE PROBLEM OF INDETERMINACY

Published online by Cambridge University Press:  19 January 2017

Stephen McKnight
Stephen McKnight*
Affiliation:
El Colegio de México
*
Address correspondence to: Stephen McKnight, Centro de Estudios Económicos, El Colegio de México, Camino al Ajusco 20, Pedregal de Santa Teresa, Mexico City 10740, Mexico; e-mail: mcknight@colmex.mx.
Get access Rights & Permissions [Opens in a new window]

Abstract

Recent research has shown that forward-looking Taylor rules are subject to indeterminacy in New Keynesian models with capital and investment spending. This paper shows that adopting a forward-looking Wicksellian rule that responds to the price level, rather than to inflation, is one potential remedy for the indeterminacy problem. This result is shown to be robust to variations in both the labor supply elasticity and the degree of price stickiness, the inclusion of capital adjustments costs, and if output also enters into the interest-rate feedback rule. Finally, it is shown that the superiority of Wicksellian rules over Taylor rules is not only confined to forward-looking policy, but also extends to both backward-looking and contemporaneous-looking specifications of the monetary policy rule.

Keywords

Equilibrium DeterminacyInterest-Rate RulesMonetary PolicyInvestmentTaylor Rules
Type
Notes
Information
Macroeconomic Dynamics , Volume 22 , Issue 5 , July 2018 , pp. 1345 - 1369
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I am grateful to the Editor, William A. Barnett, an Associate Editor, two anonymous referees, and Qinglai Meng for helpful comments and suggestions. Feedback from seminar participants at El Colegio de México is also acknowledged. The usual disclaimer applies.

References

REFERENCES

Ambler, Steve (2009) Price-level targeting and stabilization policy: A survey. Journal of Economic Surveys 23, 974–997.Google Scholar
Bauducco, Sofía and Caputo, Rodrigo (2013) Wicksell Versus Taylor: A Quest for Determinacy and the (Ir)Relevance of the Taylor Principle. Working Paper No. 705, Central Bank of Chile.Google Scholar
Bullard, James and Mitra, Kaushik (2002) Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129.Google Scholar
Calvo, Guillermo A. (1983) Staggered prices in a utility maximising framework. Journal of Monetary Economics 12, 383–398.Google Scholar
Carlstrom, Charles T. and Fuerst, Timothy S. (2005) Investment and interest rate policy: A discrete time analysis. Journal of Economic Theory 123, 4–20.Google Scholar
Clarida, Richard, Galí, Jordi, and Gertler, Mark (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115, 147–180.CrossRefGoogle Scholar
Duffy, John and Xiao, Wei (2011) Investment and monetary policy: Learning and determinacy of equilibrium. Journal of Money, Credit and Banking 43, 959–992.CrossRefGoogle Scholar
Giannoni, Marc P. (2014) Optimal interest-rate rules and inflation stabilization versus price-level stabilization. Journal of Economic Dynamics and Control 41, 110–129.CrossRefGoogle Scholar
Huang, Kevin, 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 33, 409–430.CrossRefGoogle Scholar
Kurozumi, Takushi and Van Zandweghe, Willem (2008) Investment, interest rate policy, and equilibrium stability. Journal of Economic Dynamics and Control 32, 1489–1516.Google Scholar
McKnight, Stephen and Mihailov, Alexander (2015) Do real balance effects invalidate the Taylor principle in closed and open economies? Economica 82, 938–975.Google Scholar
Mishkin, Frederic S. and Schmidt-Hebbel, Klaus (2001) One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know? NBER Working Paper No. 8397, National Bureau of Economic Research.Google Scholar
Reis, Ricardo (2013) Central bank design. Journal of Economic Perspectives 27, 17–44.Google Scholar
Sveen, Tommy and Weinke, Lutz (2005) New perspectives on capital, sticky prices, and the Taylor principle. Journal of Economic Theory 123, 21–39.Google Scholar
Taylor, John B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Series on Public Policy 39, 195–214.Google Scholar
Woodford, Michael (2003) Interest Rates and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar