Interest rate rules, inflation and the Taylor principle: An analytical exploration

Jean-Pascal Benassy

Working Papers from HAL

Abstract: The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the "Taylor principle", according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.

Keywords: Taylor principle; interest rate rules; Taylor rules; inflation; optimal monetary policy; Principe de Taylor; règles de taux d'intérêt; règles de Taylor; politique monétaire optimale (search for similar items in EconPapers)
Date: 2005-12
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00590564v1
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Related works:
Journal Article: Interest rate rules, inflation and the Taylor principle: an analytical exploration (2006)
Working Paper: Interest rate rules, inflation and the Taylor pinciple: an analytical exploration (2006)
Working Paper: Interest rate rules, inflation and the Taylor principle: An analytical exploration (2005)
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