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The Taylor principle fights back, Part I

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  • Buffie, Edward F.
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    Abstract

    New Keynesian models with limited asset market participation assert that under plausible conditions higher real interest rates increase aggregate demand, the Taylor principle leads to indeterminacy, and passive policy ensures a unique equilibrium. These striking results stem from the assumption that the real wage is highly flexible. Relaxing this assumption slightly brings back the normal world where higher real interest rates reduce aggregate demand and where the Taylor principle is effectively necessary and sufficient for a unique, stable equilibrium.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 37 (2013)
    Issue (Month): 12 ()
    Pages: 2771-2795

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    Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2771-2795

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Inflation; Taylor principle; Indeterminacy; Limited asset market participation;

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    Cited by:
    1. Job Boerma, 2014. "Openness and the (inverted) aggregate demand logic," DNB Working Papers, Netherlands Central Bank, Research Department 436, Netherlands Central Bank, Research Department.

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