Stability analysis in a monetary model with a varying intertemporal elasticity of substitution

Gomes, Orlando (2007): Stability analysis in a monetary model with a varying intertemporal elasticity of substitution.

Abstract

Models dealing with monetary policy are generally based on microfoundations that characterize the behaviour of representative agents (households and firms). To explain the representative consumer behaviour, it is generally assumed a utility function in which the intertemporal elasticity of substitution is constant. Recent literature casts some doubts about the relevance of considering such a constant elasticity value. In this note, we explore the new Keynesian monetary policy model under the assumption that the elasticity of substitution changes with expectations regarding real economic performance. As a result, one observes that some combinations of parameter values allow for a stable fixed point outcome, while other combinations of parameters are compatible with cycles of various periodicities and even a-periodic fluctuations.

• Item Type: MPRA Paper
• Institution: Escola Superior de Comunicação Social - Instituto Politécnico de Lisboa
• Language: English
• Keywords: Monetary policy; Intertemporal elasticity of substitution; Stability; Nonlinear dynamics
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

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