— 1 + α2 — ɑɪ + ao > 0 ⇔ —2(1 + β) — (μ + 1)Λι
1 (2a - 1)α(2 - Λ2)'
. + Λ2 .
< 0,
(A4)
and either
a0 — a0a2 + a1 — 1 > 0, (A5a)
or
|a2| < —3.
(A5b)
Assume μ > 1, since otherwise the aggregate system would be indeterminate. Then Case
I is not relevant since condition (A1) is violated by assumption. For Case II, condition
(A3) is satisfied ∀ μ > 1 since 1 — α(2a — 1) > 0. If a > 0.5 then by inspection condition
(A4) is automatically satisfied and either (A5a) or (A5b) is required for determinacy. If
a < 0.5 then condition (A5a) can be derived as:
λi^1 — 2a)μ λ√1 — 2a)(μ — 1) . , . .
-----+—+---- --------+--+ λ1 + a2e + (1 — 2a)αΛ 1
Λ2β Λ2
+ (1 — β) + Λιμ +
Λια(1 — 2a)μ(1 — β)
Λ2β
> 0,
which is always satisfied by inspection and thus condition (A5b) does not apply. Fi-
nally condition (A4) is automatically satisfied provided (1-2a)α(2-^2) < 1. Otherwise the
following upper bound on μ is required: μ < л^^-'а'+в—Лг'-Лг] — 1.
Now suppose that the eigenvalue eκ is stable, |eK | < 1 which requires a < 2-g [1 — δ — 2 C] <
0.5. Determinacy then requires that the remaining three eigenvalues be outside the unit
circle. From the characteristic equation of ARPI this implies that r(0) = Л1^Л2/з-2а) > 0.
If μ > 1 then r(1) = (μ-1λ- [1 + α(1 — 2a)] > 0. Therefore if r( — 1) > 0 then
β
the three roots, either real or complex, are outside the unit circle. Since r(—1) =
—2(1+ β) — Λ1(μ +1) [1 — а(1-2Л)2(2-Л2)], then r( — 1) > 0 provided α(1 — 2a)(2 — Λ2) > Λ2
and 1 + μ > λ l α(1 ''(1,,)., 2''4.22, Л2 . This completes the proof. ■
A.2 Proof of Proposition 3
If monetary policy targets current-looking consumer price inflation then one eigenvalue of
the coefficient matrix ARPI is given by eκ ≡ 1 + (2a1-1)
[= + 2δ(1 — a)]. The remaining
30