Rule-Based Monetary Policy and the Threat of Indeterminacy When Trend Inflation Is Low

Hashmat Khan (), Louis Phaneuf and Jean Gardy Victor
Additional contact information
Louis Phaneuf: University of Quebec in Montreal
Jean Gardy Victor: Desjardins Group

No 20-08, Working Papers from Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management

Abstract: Indeterminacy in new Keynesian models with Calvo-contracts can occur even at low trend inflation levels of 2 or 3%. The interaction of trend inflation with nominal wage rigidity and trend growth in output causes large distortions in the steady state and expands the indeterminacy region. Consequently, even interest rate rules with strong inflation responses may not be sufficient to ensure determinacy. A policy rule reacting to output growth but not to output gap significantly increases the prospect of determinacy. Although the threat of indeterminacy is less severe under Taylor-contracts, significant departures from the original Taylor principle are required for determinacy

Keywords: Low trend inflation; Taylor rule; Output gap; Output growth; Sticky wages; Trend growth; Determinacy. (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2020-05
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Citations: View citations in EconPapers (3)

Published, Journal of Monetary Economics

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Related works:
Journal Article: Rules-based monetary policy and the threat of indeterminacy when trend inflation is low (2020)
Working Paper: Rules-Based Monetary Policy and the Threat of Indeterminacy When Trend Inflation is Low (2019)
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