511 - Determinacy analysis in high order dynamic systems: The case of nominal rigidities and limited asset market participation

DNB Working Papers
Date 21 April 2016
We show how to use Hurwitz polynomials to study the stability and uniqueness of Rational Expectation equilibria in Dynamic General Equilibrium models. We apply this method to a model characterized by staggered wage and price contracts and by limited asset market participation (LAMP). We prove analytically in a fourth-order dynamics system that, once nominal wage stickiness is taken into account, LAMP does not invalidate the Taylor Principle: for any plausible degree of asset market participation an active interest rate rule ensures the uniqueness of the rational expectation equilibrium.
Keywords: determinacy, high-order dynamics, sticky wages, non-Ricardian household.
JEL Classifications: C62, E50.