Is the Taylor principle still valid when rates are low?
Stephen D. Morris
Journal of Macroeconomics, 2020, vol. 64, issue C
The Taylor principle states that the policy rate must respond more than one-for-one with inflation, or else inflation may become untethered. I show that nonlinear dynamics near, but above the interest rate lower bound, imply a modified principle of two-for-one. Thus, to avoid low-inflation equilibria in a low interest rate environment, policymakers must respond to disinflation twice as forcefully as they would otherwise.
Keywords: Monetary policy; Effective lower bound; Determinacy; Taylor principle (search for similar items in EconPapers)
JEL-codes: E47 E52 E58 (search for similar items in EconPapers)
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