Investment and interest rate policy

The paper's theorems reverse two standard results of New Keynesian economics simply by appending endogenous investment to a benchmark imperfect competition-sticky price model. Our results are: (a) a passive interest rate rule, where the monetary authority responds to inflation by lowering the real interest rate, implies local equilibrium uniqueness, whereas an active rule does not generate a locally unique equilibrium; (b) a temporary, exogenous increase in the nominal interest rate causes a temporary increase in output and investment. Extensions of the benchmark model, including generalized preferences and alternative interest rate rules, are also examined. (C) 2001 Academic Press.