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Interest rate rules, inflation and the Taylor principle: An analytical exploration

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  • Jean-Pascal Bénassy

    (CEPREMAP - Centre pour la recherche économique et ses applications - CEPREMAP, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

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    Abstract

    The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the "Taylor principle", according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/59/05/64/PDF/wp200546.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number halshs-00590564.

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    Date of creation: Dec 2005
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    Handle: RePEc:hal:wpaper:halshs-00590564

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00590564
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    Related research

    Keywords: Taylor principle ; interest rate rules ; Taylor rules ; inflation ; optimal monetary policy;

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    1. Devereux, Michael B & Yetman, James, 2003. " Predetermined Prices and the Persistent Effects of Money on Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 729-41, October.
    2. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
    3. Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre.
    4. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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