Trend Inflation, Taylor Principle and Indeterminacy

Guido Ascari () and Tiziano Ropele

Kiel Working Papers from Kiel Institute for the World Economy

Abstract: We show that low trend inflation strongly affects the dynamics of a standard Neo-Keynesian model where monetary policy is described by a standard Taylor rule. Moreover, trend inflation enlarges the indeterminacy region in the parameter space, substantially altering the so-called Taylor principle. The main results hold for di¤erent types of Taylor rules, inertial policy rules and indexation schemes. The key message is that, whatever the set up, the literature on Taylor rules cannot disregard average inflation in both theoretical and empirical analysis.

Keywords: Sticky Prices; Taylor Rules and Trend Inflation (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-06
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Related works:
Working Paper: Trend Inflation, Taylor Principle and Indeterminacy (2005)
Working Paper: Trend inflation, Taylor principle and indeterminacy (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:kie:kieliw:1332

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