Countercyclical versus Procyclical Taylor Principles

Jean-Bernard Chatelain and Kirsten Ralf

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: Assuming inflation is a forward variable in Taylor (1999) model, this paper finds opposite policy rule recommandations with counter-cyclical policy rule parameters (Taylor principle: inflation rule larger than one and bounded upwards) in the case of optimal policy under commitment versus pro-cyclical policy rule parameters (inflation rule parameter below zero) in the case of discretionary policy. For the observed high inertia of the Fed with variations of the nominal policy rate within the range [0%,4%] during the great moderation, the cost of time-inconsistency is negligible for optimal policy. Time-inconsistency cannot be the ultimate argument to reject counter-cyclical Taylor principle.

Keywords: Monetary policy; Optimal policy under commitment; Time consistent discretionary policy; Taylor rule (search for similar items in EconPapers)
JEL-codes: C6 E4 E5 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:129796

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