Wicksell Versus Taylor: A Quest for Determinancy and the (IR) Relevance of the Taylor Principle

Sofia Bauducco and Rodrigo Caputo

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: In a new-Keynesian model we compare the determinacy regions of price-level targeting rules (called Wicksellian rules) and Taylor rules. We conclude that Wicksellian rules do not require the Taylor principle to be satisfied to induce determinacy. Moreover, the areas of determinacy are generally large under Wicksellian rules. Our results have two implications. First, estimating Taylor rules when the true rule is Wicksellian may lead to conclude that the equilibrium is indeterminate when this is not the case. Second, by following a Wicksellian rule, the frequency of occurrence of an active zero lower bound on the policy rate is greatly reduced.

Date: 2013-09
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:705

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