The Incredible Taylor Principle

Pablo Andrés Neumeyer () and Juan Pablo Nicolini ()

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: We discuss the extent to which the Taylor principle can solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate feedback rule. We first show that only the limiting behavior of the feedback rule matters, so identifying in the data if the Taylor principle holds cannot be achieved, above and beyond the arguments specified in Cochrane (2008). Second, we show that the competitive equilibrium under interest rate feedback rules is nominally determined if the Taylor principle holds and, in addition, two ad-hoc restrictions on equilibrium are satisfied. These require equilibrium inflation to be bounded and equilibria to be locally unique. Finally, we show that the Taylor principle is strongly time inconsistent, in a sense we make very precise.

Pages: 42 pages
Date: 2024-04
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2025_07

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