Determinacy Analysis in High Order Dynamic Systems: The Case of Nominal Rigidities and Limited Asset Market Participation

Ascari, Guido; Colciago, Andrea; Rossi, Lorenza

doi:10.2139/ssrn.2768595

Determinacy Analysis in High Order Dynamic Systems: The Case of Nominal Rigidities and Limited Asset Market Participation

De Nederlandsche Bank Working Paper No. 511

24 Pages Posted: 25 Apr 2016

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Lorenza Rossi

University of Pavia - Department of Economics and Management

There are 2 versions of this paper

Date Written: April 21, 2016

Abstract

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 Classification: C62, E50

Suggested Citation: Suggested Citation

Ascari, Guido and Colciago, Andrea and Rossi, Lorenza, Determinacy Analysis in High Order Dynamic Systems: The Case of Nominal Rigidities and Limited Asset Market Participation (April 21, 2016). De Nederlandsche Bank Working Paper No. 511, Available at SSRN: https://ssrn.com/abstract=2768595 or http://dx.doi.org/10.2139/ssrn.2768595