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

Jean-Pascal Benassy

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Abstract: A most wellknown determinacy condition on interest rate rules is the "Taylor principle", which says that nominal interest rates should respond more than hundred percent to inflation. Unfortunately, notably because interest rates must be positive, the Taylor principle cannot be satisfied for all inflation 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 was so far the main alternative for determinacy.

Keywords: fiscal theory of the price level; Taylor rules; interest rate rules; global determinacy; Taylor principle; règles de Taylor; théorie fiscale des prix; Principe de Taylor; détermination globale; règles de taux d'intérêt (search for similar items in EconPapers)
Date: 2007-10
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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 (2009)
Working Paper: Interest rate rules and global determinacy: An alternative to the Taylor principle (2007)
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