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The Incredible Taylor Principle

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Abstract

This note addresses the role of the Taylor principle to solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate rule. We first study the role of imposing two additional ad-hoc restrictions on the definition of equilibrium. Imposing the equilibrium to be locally unique never delivers a unique outcome. Imposing the equilibrium to be bounded, renders the outcome unique only if the inflation target is the Friedman rule. Second, we show that the Taylor principle is strongly time inconsistent - in a sense we make very precise - and that policies that implement the Friedman rule are the only sustainable policies.

Suggested Citation

  • Pablo Andrés Neumeyer & Juan Pablo Nicolini, 2022. "The Incredible Taylor Principle," Working Papers 790, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:93934
    DOI: 10.21034/wp.790
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    More about this item

    Keywords

    Taylor principle; Uniqueness of equilibrium; Time consistency;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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