The Taylor principle fights back, Part I

Edward F. Buffie

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 12, 2771-2795

Abstract: New Keynesian models with limited asset market participation assert that under plausible conditions higher real interest rates increase aggregate demand, the Taylor principle leads to indeterminacy, and passive policy ensures a unique equilibrium. These striking results stem from the assumption that the real wage is highly flexible. Relaxing this assumption slightly brings back the normal world where higher real interest rates reduce aggregate demand and where the Taylor principle is effectively necessary and sufficient for a unique, stable equilibrium.

Keywords: Inflation; Taylor principle; Indeterminacy; Limited asset market participation (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:12:p:2771-2795

DOI: 10.1016/j.jedc.2013.08.003

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