Interest rate rules and global determinacy: An alternative to the Taylor principle

Jean-Pascal Benassy

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Abstract: A well-known determinacy condition on interest rate rules is the "Taylor principle," which states that nominal interest rates should respond more than 100 percent to inflation. Unfortunately, notably because interest rates must be positive, the Taylor principle cannot be satisfied for all interest rates, and as a consequence global determinacy may not prevail even though there exists a locally determinate equilibrium. We propose here a simple alternative to the Taylor principle, which takes the form of a new condition on interest rate rules that ensures global determinacy. An important feature of the policy package is that it does not rely at all on any of the fiscal policies associated with the "fiscal theory of the price level," which has so far been the main alternative for determinacy.

Keywords: Taylor principle; Global determinacy; Interest rate rules; Taylor rules (search for similar items in EconPapers)
Date: 2009-12
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Citations: View citations in EconPapers (1)

Published in International Journal of Economic Theory, 2009, 5 (4), pp.359-374. ⟨10.1111/j.1742-7363.2009.00114.x⟩

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Related works:
Journal Article: Interest rate rules and global determinacy: An alternative to the Taylor principle (2009)
Working Paper: Interest rate rules and global determinacy: An alternative to the Taylor principle (2007)
Working Paper: Interest rate rules and global determinacy: An alternative to the Taylor principle (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00754322

DOI: 10.1111/j.1742-7363.2009.00114.x

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