Document Type
Working Paper
Publication Date
2005
Abstract
We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the "Taylor principle" no longer guarantees either determinacy or E-stability of the rational expectations equilibrium.
Recommended Citation
Xiao, Wei, "Increasing Returns and the Design of Interest Rate Rules;" (2005). Department of Economics and Finance Working Papers, 1991-2006. Paper 40.
https://scholarworks.uno.edu/econ_wp/40
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