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.
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