The Incredible Taylor Principle

Pablo Neumeyer and Juan Pablo Nicolini

No 658, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper discusses the extent to which the Taylor principle can solve the indeterminacy of equilibria in economies where the monetary authority follows an interest rate feedback rule. We first show that only the limiting behavior of the feedback rule matters, so identifying in the data if the Taylor principle holds cannot be achieved. Second, we show that the competitive equilibrium under interest rate feedback rules is nominally determined if the Taylor principle holds and, in addition, two ad-hoc restrictions on equilibrium are satisfied. These require equilibrium inflation to be bounded and equilibria to be locally unique. Finally, we show that the Taylor principle is strongly time inconsistent, in a sense we make very precise.

Keywords: Taylor principle; Uniqueness of equilibrium; Time consistency (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2024-06-18
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Working Paper: The Incredible Taylor Principle (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:98596

DOI: 10.21034/sr.658

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