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Is the Taylor principle still valid when rates are low?

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  • Morris, Stephen D.

Abstract

The Taylor principle states that the policy rate must respond more than one-for-one with inflation, or else inflation may become untethered. I show that nonlinear dynamics near, but above the interest rate lower bound, imply a modified principle of two-for-one. Thus, to avoid low-inflation equilibria in a low interest rate environment, policymakers must respond to disinflation twice as forcefully as they would otherwise.

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  • Morris, Stephen D., 2020. "Is the Taylor principle still valid when rates are low?," Journal of Macroeconomics, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:jmacro:v:64:y:2020:i:c:s0164070419304690
    DOI: 10.1016/j.jmacro.2020.103192
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    More about this item

    Keywords

    Monetary policy; Effective lower bound; Determinacy; Taylor principle;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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