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Trend Inflation, Taylor Principle and Indeterminacy

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Author Info

  • Guido Ascari

    ()
    (University of Pavia)

  • Tiziano Ropele

    ()
    (Department of Economics, University of Milan-Bicocca)

Abstract

In this paper, we show that low trend inflation strongly affects the dynamics of a standard Neo-keynesian model where monetary policy is described by a standard Taylor rule. In particular, we show that trend inflation: (i) enlarges the indeterminacy region in the parameter space, substantially altering the so-called Taylor principle; (ii) changes the dynamic responses of the economy. Furthermore, we generalize the basic analysis to different types of Taylor rules, inertial policy rules and indexation schemes. The key point is that, whatever the set up, the literature on Taylor rules cannot disregard average inflation in both theoretical and empirical analysis.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper93.pdf
File Function: First version, 2005
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 93.

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Length: 63 pages
Date of creation: Oct 2005
Date of revision: Oct 2005
Handle: RePEc:mib:wpaper:93

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Keywords: Sticky Prices; Taylor Rules and Trend Inflation;

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References

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  17. Guido Ascari, 2004. "Staggered prices and trend inflation: some nuisances," Macroeconomics 0404029, EconWPA.
  18. Guido Ascari & Tiziano Ropele, 2007. "Optimal monetary policy under low trend inflation," Temi di discussione (Economic working papers) 647, Bank of Italy, Economic Research and International Relations Area.
  19. Graham, Liam & Snower, Dennis J., 2004. "The real effects of money growth in dynamic general equilibrium," Working Paper Series 0412, European Central Bank.
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