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21 april 2016 Onderzoek

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.

Working paper no. 511.

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

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authors

  • Guido Ascari
  • Andrea Colciago
  • Lorenza Rossi