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THE COST CHANNEL OF MONETARY POLICY AND INDETERMINACY

Published online by Cambridge University Press:  01 November 2008

Paolo Surico
Paolo Surico*
Affiliation:
Bank of England and University of Bari
*
Address correspondence to: Paolo Surico, External MPC Unit, Bank of England, Threadneedle Street, London, EC2R 8AH, UK; e-mail: paolo.surico@bankofengland.co.uk.
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Abstract

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We study the conditions that guarantee equilibrium determinacy in a standard sticky price model augmented with a cost channel. A central bank that assigns some positive weight to the output gap in its reaction function makes the economy more prone to multiple equilibria relative to the standard case. The value of the threshold on the interest rate response to inflation is above one and depends on the fraction of firms that need to borrow their bills payment.

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Notes
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Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008, pp. 724 - 735
Copyright
Copyright © Cambridge University Press 2008

References

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