Investment and Monetary Policy: Learning and Determinacy of Equilibrium
Article first published online: 20 JUL 2011
© 2011 The Ohio State University
Journal of Money, Credit and Banking
Volume 43, Issue 5, pages 959–992, August 2011
How to Cite
DUFFY, J. and XIAO, W. (2011), Investment and Monetary Policy: Learning and Determinacy of Equilibrium. Journal of Money, Credit and Banking, 43: 959–992. doi: 10.1111/j.1538-4616.2011.00403.x
- Issue published online: 20 JUL 2011
- Article first published online: 20 JUL 2011
- Received August 29, 2008; and accepted in revised form December 27, 2010.
- monetary policy;
- new Keynesian model;
- firm-specific capital
We explore determinacy and expectational stability (learnability) of rational expectations equilibrium (REE) in New Keynesian (NK) models that include capital. Using a consistent calibration across three different models—labor-only, firm-specific capital, or an economy-wide rental market for capital, we provide a clear picture of when REE is determinate and learnable and when it is not under a variety of monetary policy rules. Our findings make a case for greater optimism concerning the use of such rules in NK models with capital. While Bullard and Mitra’s (2002, 2007) findings for the labor-only NK model do not always extend to models with capital, we show that determinate and learnable REE can be achieved in NK models with capital if there is (i) plausible capital adjustment costs, (ii) some weight given to output in the policy rule, and/or (iii) a policy of interest rate smoothing.