Affordable Access

Publisher Website

Investment and the Taylor rule in a dynamic Keynesian model

Authors
Journal
Journal of Economic Dynamics and Control
0165-1889
Publisher
Elsevier
Publication Date
Volume
34
Issue
10
Identifiers
DOI: 10.1016/j.jedc.2010.05.016
Keywords
  • Taylor Rule
  • Bounded Rationality
  • Investment
Disciplines
  • Economics

Abstract

Abstract We study monetary policy in a reduced-form dynamic model with bounded rationality and an empirically motivated investment function. Investment has important dynamic effects in our model. In particular, the cost of capital effect on investment is more important for monetary transmission than the more widely studied intertemporal substitution parameter in consumption. Furthermore, a strong Taylor rule response to unemployment in this model is more effective in stabilizing demand-induced fluctuations than a strong response to inflation. Indeed, an excessively aggressive response to inflation destabilizes the simulated output and inflation fluctuations.

There are no comments yet on this publication. Be the first to share your thoughts.