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Wicksell Versus Taylor: A Quest for Determinancy and the (IR) Relevance of the Taylor Principle

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  • Sofía Bauducco
  • Rodrigo Caputo

Abstract

In a new-Keynesian model we compare the determinacy regions of price-level targeting rules (called Wicksellian rules) and Taylor rules. We conclude that Wicksellian rules do not require the Taylor principle to be satisfied to induce determinacy. Moreover, the areas of determinacy are generally large under Wicksellian rules. Our results have two implications. First, estimating Taylor rules when the true rule is Wicksellian may lead to conclude that the equilibrium is indeterminate when this is not the case. Second, by following a Wicksellian rule, the frequency of occurrence of an active zero lower bound on the policy rate is greatly reduced.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 705.

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Date of creation: Sep 2013
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Handle: RePEc:chb:bcchwp:705

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  1. Michael Woodford & Vasco Curdia, 2010. "The Central Bank's Balance Sheet as an Instrument of Monetary Policy," 2010 Meeting Papers 136, Society for Economic Dynamics.
  2. Yuriy Gorodnichenko & Matthew D. Shapiro, 2006. "Monetary Policy When Potential Output is Uncertain: Understanding the Growth Gamble of the 1990s," NBER Working Papers 12268, National Bureau of Economic Research, Inc.
  3. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
  4. Guido Ascari & Tiziano Ropele, 2007. "Trend Inflation, Taylor Principle and Indeterminacy," Kiel Working Papers 1332, Kiel Institute for the World Economy.
  5. Boivin, Jean, 2006. "Has U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1149-1173, August.
  6. Adolfson, Malin, 2007. "Incomplete exchange rate pass-through and simple monetary policy rules," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 468-494, April.
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  8. Luis Gonzalo Llosa & Vicente Tuesta, 2006. "Determinacy and Learnability of Monetary Policy Rules in Small Open Economies," Research Department Publications 4479, Inter-American Development Bank, Research Department.
  9. Malin Adolfson & Stefan Laséen & Jesper Lindé & Lars E.O. Svensson, 2008. "Optimal Monetary Policy in an Operational Medium-Sized DSGE Model," NBER Working Papers 14092, National Bureau of Economic Research, Inc.
  10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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  12. Dittmar, Robert D. & Gavin, William T., 2005. "Inflation-targeting, price-path targeting and indeterminacy," Economics Letters, Elsevier, vol. 88(3), pages 336-342, September.
  13. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor Principle," NBER Working Papers 11874, National Bureau of Economic Research, Inc.
  14. Richard Clarida, 2001. "The Empirics of Monetary Policy Rules in Open Economies," NBER Working Papers 8603, National Bureau of Economic Research, Inc.
  15. Charles L. Evans, 2012. "Monetary Policy in a Low‐Inflation Environment: Developing a State‐Contingent Price‐Level Target," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 147-155, 02.
  16. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, 02.
  17. Charles Engel & Kenneth D. West, 2004. "Taylor Rules and the Deutschmark-Dollar Real Exchange Rate," NBER Working Papers 10995, National Bureau of Economic Research, Inc.
  18. Gert Peersman, 2012. "Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound," 2012 Meeting Papers 400, Society for Economic Dynamics.
  19. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  20. Blinder, Alan S, 2000. "Monetary Policy at the Zero Lower Bound: Balancing the Risks: Summary Panel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1093-99, November.
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