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Int Rev Econ (2016) 63:215232
DOI 10.1007/s12232-016-0250-7
RESEARCH ARTICLE
Eiji Tsuzuki1
Received: 8 June 2015 / Accepted: 4 January 2016 / Published online: 19 January 2016 Springer-Verlag Berlin Heidelberg 2016
Abstract It has been suggested that local equilibrium determinacy can be achieved by applying active monetary policies combined with passive scal policies in discrete-time New Keynesian (NK) models that include a scal policy rule with a time lag in the policy response. However, indeterminacy can occur even under such policies in models with money in the production function. In this paper, we rst conrm that these results hold in a continuous-time NK model without a policy lag. Furthermore, we present the case of a scal policy lag that is capable of avoiding indeterminacy.
Keywords Continuous-time New Keynesian model Policy lag Delay-
differential equation Dynamic analysis
JEL Classication E32 E52
1 Introduction
Optimizing models that consider stickiness associated with price and nominal wages are often referred to as New Keynesian (NK) models.1 In the simplest NK model, the monetary authorities conduct the monetary policy in accordance with rules that induce responses in the nominal interest rate based on the ination rate (interest rate rules). If the nominal interest rate changes by more than one unit in response to each unit change in the ination rate, the policy is referred to as active. Conversely, if the
1 Introductory textbooks for NK models are provided by Woodford (2003), Gal (2008), and Walsh (2010).
& Eiji Tsuzuki [email protected]
1 Faculty of Economics, Chiba Keizai University, Chiba, Japan
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nominal interest rate changes by less than one unit, it is referred to as passive. To achieve local equilibrium determinacy, monetary policy must be active. This well-known proposition is called the Taylor principle.
Leeper (1991) studied the interaction between monetary and scal policies and evaluated the efcacy of a scal policy rule in which the lump-sum tax responds to the total government liabilities (tax collection rule). An active scal policy manipulates the amount of tax without abiding by budget discipline. In contrast, a passive scal policy seeks to keep the total government liabilities from diverging, which is...