Firm-Specific Investment, Sticky Prices, and the Taylor Principle

UPF Economics and Business Working Paper 780

31 Pages Posted: 16 Nov 2005

See all articles by Tommy Sveen

Tommy Sveen

Norges Bank - Research Department

Lutz Weinke

Independent

Date Written: October 26, 2004

Abstract

According to the Taylor principle a central bank should adjust the nominal interest rate by more than one-for-one in response to changes in current inflation. Most of the existing literature supports the view that by following this simple recommendation a central bank can avoid being a source of unnecessary fluctuations in economic activity. The present paper shows that this conclusion is not robust with respect to the modeling of capital accumulation. We use our insights to discuss the desirability of alternative interest rate rules. Our results suggest a reinterpretation of monetary policy under Volcker and Greenspan: The empirically plausible characterization of monetary policy can explain the stabilization of macroeconomic outcomes observed in the early eighties for the US economy. The Taylor principle in itself cannot.

Keywords: Sticky Prices, aggregate investment, monetary policy

JEL Classification: E22, E31

Suggested Citation

Sveen, Tommy and Weinke, Lutz, Firm-Specific Investment, Sticky Prices, and the Taylor Principle (October 26, 2004). Available at SSRN: https://ssrn.com/abstract=848644 or http://dx.doi.org/10.2139/ssrn.848644

Tommy Sveen

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Lutz Weinke (Contact Author)

Independent

No Address Available

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