The Incredible Taylor Principle

Pablo Neumeyer and Juan Pablo Nicolini

No 790, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: This note addresses the role of the Taylor principle to solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate rule. We first study the role of imposing two additional ad-hoc restrictions on the definition of equilibrium. Imposing the equilibrium to be locally unique never delivers a unique outcome. Imposing the equilibrium to be bounded, renders the outcome unique only if the inflation target is the Friedman rule. Second, we show that the Taylor principle is strongly time inconsistent - in a sense we make very precise - and that policies that implement the Friedman rule are the only sustainable policies.

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: 2022-01-28
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: The Incredible Taylor Principle (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:93934

DOI: 10.21034/wp.790

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