Economics at your fingertips  

Rules-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: Université du Québec à Montréal,

No 18-08, Carleton Economic Papers from Carleton University, Department of Economics

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 increasesthe 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: 32 pages
Date: 2018-07-14, Revised 2019-03-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Published: Carleton Economic Papers

Downloads: (external link)

Related works:
Journal Article: Rules-based monetary policy and the threat of indeterminacy when trend inflation is low (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Carleton Economic Papers from Carleton University, Department of Economics C870 Loeb Building, 1125 Colonel By Drive, Ottawa Ontario, K1S 5B6 Canada.
Bibliographic data for series maintained by Sabrina Robineau ().

Page updated 2021-04-15
Handle: RePEc:car:carecp:18-08