Trend Inflation, Taylor Principle, and Indeterminacy

Guido Ascari and Tiziano Ropele

Journal of Money, Credit and Banking, 2009, vol. 41, issue 8, 1557-1584

Abstract: Positive trend inflation shrinks the determinacy region of a basic New Keynesian dynamic stochastic general equilibrium model when monetary policy is conducted by a contemporaneous interest rate rule. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, which requires that the nominal interest rate to be raised by more than the increase in inflation in the long run, is a sufficient condition for local determinacy of equilibrium. This finding holds for different types of Taylor rules, inertial policy rules, and price indexation schemes. Therefore, regardless of the theoretical setup, the monetary literature on interest rate rules cannot disregard average inflation in both theoretical and empirical analyses.

Date: 2009
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https://doi.org/10.1111/j.1538-4616.2009.00272.x

Related works:
Journal Article: Trend Inflation, Taylor Principle, and Indeterminacy (2009)
Working Paper: Trend inflation, Taylor principle and indeterminacy (2009)
Working Paper: Trend Inflation, Taylor Principle and Indeterminacy (2009)
Working Paper: Trend Inflation, Taylor Principle and Indeterminacy (2007)
Working Paper: Trend Inflation, Taylor Principle and Indeterminacy (2005)
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