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Taylor rules in a limited participation model

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  • Lawrence J. Christiano
  • Christopher J. Gust

Abstract

The authors use the limited participation model of money to study Taylor rules' operating characteristics for setting the interest rate. Rules are evaluated according to their ability to protect the economy from bad outcomes like the burst of inflation observed in the 1970s. On the basis of their analysis, the authors argue for a rule that 1) raises the nominal interest rate more than one-for-one with a rise in inflation; and 2) does not change the interest rate in response to a change in output relative to trend.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9902.

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Date of creation: 1999
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Handle: RePEc:fip:fedcwp:9902

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Keywords: Monetary policy ; Interest rates;

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