Determinacy without the Taylor Principle

George-Marios Angeletos and Chen Lian

No 28881, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Our understanding of monetary policy is complicated by an equilibrium-selection conundrum: because the same path for the nominal interest rate can be associated with multiple equilibrium paths for inflation and output, there is a long-standing debate about what the right equilibrium selection is. We offer a potential resolution by showing that small frictions in social memory and intertemporal coordination can remove the indeterminacy. Under our perturbations, the unique surviving equilibrium is the same as that selected by the Taylor principle, but it no more relies on it; monetary policy is left to play only a stabilization role; and fiscal policy needs to be Ricardian, even when monetary policy is passive.

JEL-codes: D8 E4 E5 E7 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (4)

Published as George-Marios Angeletos & Chen Lian, 2023. "Determinacy without the Taylor Principle," Journal of Political Economy, vol 131(8), pages 2125-2164.

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