We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of...

We consider optimal monetary policy in New Keynesian models with inertia. First order conditions, which we call the MJB-alternative, are found to improve upon the timeless perspective. The MJB-alternative is shown to be the best possible in the sense that it minimizes policymakers' unconditional...

By endowing his agents with simple forecasting models, or representations, Woodford (1990) found that finite state Markov sunspot equilibria may be stable under learning. We show that common factor representations generalize to all sunspot equilibria the representations used by Woodford (1990)....

The aim of this paper is to determine whether it would be desirable from the perspective of macroeconomic balance for central banks to take account of nominal exchange rate movements when framing monetary policy. The theoretical framework is a small, open DSGE economy that is closed by a Taylor...

Using a closed economy model with a flexible-price good and a sticky-price good we study the conditions under which interest rate rules induce real determinacy and, more importantly, the MSV solution is learnable in the E-stability sense proposed by Evans and Honkapohja (2001). We show that...

Previous literature has shown that, in a New Keynesian model, an expectations based policy rule induces E-stability of the fundamental equilibrium, while a fundamentals based one does not. We derive an alternative rule, based only on fundamentals, which can also achieve stability of equilibrium...