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Determinacy and Expectational Stability of Equilibrium in a Monetary Sticky-Price Model with Taylor Rule*1

February 2006
Takushi Kurozumi*2

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  • *1 This article is part of the author's Ph.D. dissertation at Carnegie Mellon University. The author gratefully acknowledges advice and encouragement from Bennett McCallum. The author also thanks Michele Berardi, John Duffy, Christian Jensen, Finn Kydland, Mildred Myers, the editor Charles Plosser, and an anonymous referee for helpful comments and suggestions. Any remaining errors are the sole responsibility of the author. The views expressed herein are those of the author and should not be interpreted as those of the Bank of Japan.
  • *2 Corresponding author. Research and Statistics Department, Bank of Japan, 2-1-1 Nihonbashi Hongokucho, Chuo-ku, Tokyo 103-8660, Japan.
    E-mail address: takushi.kurozumi@boj.or.jp

Abstract

Recent studies show that the Taylor rule possesses desirable properties in terms of generating determinacy and E-stability of rational expectations equilibria under sticky prices. This paper examines whether this policy rule retains these properties within a discrete-time money-in-utility-function model, employing three timings of money balances of the utility function that the existing literature contains: end-of-period timing and two types of cash-in-advance timing. This paper shows: (i) Even a small degree of non-separability of the utility function between consumption and real balances causes the Taylor rule to be much more likely to induce indeterminacy or E-instability if this rule responds not only to inflation but also to output or the output gap; (ii) Differences among the three timings strongly alter conditions for the Taylor rule to ensure both determinacy and E-stability.

JEL Classification Number: E52

Keywords:
Determinacy; E-stability; Monetary model; Taylor rule; Taylor principle