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Wicksellian Rules and the Taylor Principle: Some Practical Implications *
Author(s) -
Bauducco Sofia,
Caputo Rodrigo
Publication year - 2020
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12331
Subject(s) - determinacy , indeterminacy (philosophy) , economics , new keynesian economics , taylor rule , inflation (cosmology) , mathematical economics , simple (philosophy) , keynesian economics , order (exchange) , monetary policy , central bank , mathematics , philosophy , finance , mathematical analysis , physics , epistemology , theoretical physics
In this paper, we derive and compare the determinacy regions of price‐level targeting rules (Wicksellian rules) and Taylor rules in a standard New Keynesian model. We conclude that Wicksellian rules do not require the Taylor principle to hold in order to induce determinacy. Our results have two implications. First, in a univariate setting, the estimation of simple Taylor rules when the true rule is Wicksellian can lead to the erroneous conclusion that the equilibrium is indeterminate. Second, indeterminacy is ruled out when using system‐based methods, but it can be concluded that the central bank is less averse to inflation movements than it actually is.