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Trend Inflation, Taylor Principle, and Indeterminacy
Author(s) -
ASCARI GUIDO,
ROPELE TIZIANO
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00272.x
Subject(s) - determinacy , taylor rule , economics , monetary policy , new keynesian economics , inflation (cosmology) , indeterminacy (philosophy) , keynesian economics , nominal interest rate , interest rate , indexation , output gap , real interest rate , dynamic stochastic general equilibrium , econometrics , mathematical economics , macroeconomics , mathematics , central bank , mathematical analysis , physics , quantum mechanics , theoretical physics
Positive trend inflation shrinks the determinacy region of a basic New Keynesian dynamic stochastic general equilibrium model when monetary policy is conducted by a contemporaneous interest rate rule. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, which requires that the nominal interest rate to be raised by more than the increase in inflation in the long run, is a sufficient condition for local determinacy of equilibrium. This finding holds for different types of Taylor rules, inertial policy rules, and price indexation schemes. Therefore, regardless of the theoretical setup, the monetary literature on interest rate rules cannot disregard average inflation in both theoretical and empirical analyses.