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ResearchPaper
2010
Interest rate policy and supply-side adjustment dynamics
Interest rate policy and supply-side adjustment dynamics
Abstract (English)
In contrast to the present consensus view of stabilization policy, theoretical and empirical research strongly support the consideration of supply-side adjustment to pronounced variations of factor-utilization in order to trace a more realistic pattern of macroeconomic adjustment dynamics within simulation studies. Against this background, our paper seeks to illuminate the relevance of endogenous supply-side adjustment for monetary policy research. We modify a basic New Keynesian model by explicitly considering demand-side stimulus on the evolution of productive capacity and analyze stability, impulse response, and welfare issues if the central bank follows a simple monetary policy rule. Thereby, we control for the robustness of our policy implications by various states of output gap mismeasurement the central bank might be confronted with. We find that, in contrast to a basic New Keynesian Model, output gap stabilization plays a more prominent role when potential output is endogenous.
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Hohenheimer Diskussionsbeiträge; 324
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Faculty
Faculty of Business, Economics and Social Sciences
Institute
Institut für Volkswirtschaftslehre (bis 2010)
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Language
English
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Classification (DDC)
330 Economics
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Free keywords
monetary policy factor-utilization endogenous potential output output gap mismeasurement
Standardized keywords (GND)
Geldpolitik