EAN: 9783631611289

INTEREST-RATE RULES IN A NEW KEYNESIAN FRAMEWOR...

The last decades have witnessed major progress in both monetary policy theory and practice 
with broad academic consensus on the desirability of monetary policy rules and ongoing research
on their exact specification. Typically  the analysis is carried out in a New Keynesian
framework with nominal rigidities and constant capital stock. The latter represents a
constraint that this study seeks to overcome by introducing a model with investment and capital
adjustment costs. The work assesses different interest-rate rule specifications with respect to
the target variables included  based on two criteria: determinacy of rational-expectations
equilibrium and convergence to steady state after a shock. The study concludes that rules with
both an inflation and an output gap target ensure a unique rational-expectations equilibrium
and a less distressful adjustment of the economy after the occurrence of shocks.

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