A NOTE ON EXPECTATIONAL STABILITY UNDER NONZERO TREND INFLATION

Teruyoshi Kobayashi and Ichiro Muto

Macroeconomic Dynamics, 2013, vol. 17, issue 3, 681-693

Abstract: This study examines the expectational stability of rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is nonzero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous, forecast, or lagged data) introduced in the Taylor rule. Our results suggest that high macroeconomic volatility during the period of high trend inflation can be explained well by introducing the concept of expectational stability.

Date: 2013
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Working Paper: A note on expectational stability under non-zero trend inflation (2011)
Working Paper: A note on expectational stability under non-zero trend inflation (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:17:y:2013:i:03:p:681-693_00

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