Stabilising Taylor rules when the supply shock has a unit root

Fang Yao

Journal of Macroeconomics, 2014, vol. 41, issue C, 16-20

Abstract: This paper studies the implication of unit root supply shocks for the Taylor rule. I find that, when supply shocks have a unit root, if a central bank wishes to guarantee the stationarity of inflation, then their interest rate reaction function should not respond to the output gap. Once the stationarity of inflation is guaranteed by the output-gap-response parameter, the “Taylor principle” can be applied for warranting determinacy of the dynamics.

Keywords: Inflation persistence; Taylor rule; Unit root (search for similar items in EconPapers)
JEL-codes: E30 E40 E50 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:41:y:2014:i:c:p:16-20

DOI: 10.1016/j.jmacro.2014.04.001

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