Determinacy Analysis in High Order Dynamic Systems: The Case of Nominal Rigidities and Limited Asset Market Participation
24 Pages Posted: 25 Apr 2016
Date Written: April 21, 2016
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
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