Determinacy analysis in high order dynamic systems : The case of nominal rigidities and limited asset market participation

Ascari, G. and Colciago, A. and Rossi, L. (2017) Determinacy analysis in high order dynamic systems : The case of nominal rigidities and limited asset market participation. Economics Letters, 159. pp. 82-87. ISSN 0165-1765

Abstract

We show how to use Hurwitz polynomials to study the stability and uniqueness of Rational Expectation equilibria (REE) in Dynamic General Equilibrium models (DGE). We apply this method to a model characterized by sticky wages and prices and by limited asset market participation (LAMP). We prove analytically in a fourth-order dynamics system that, once nominal wage stickiness is taken into account, LAMP does not invalidate the Taylor Principle.