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Interest rate rules and global determinacy: An alternative to the Taylor principle

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Author Info
Jean-Pascal Bénassy
Abstract

A most wellknown determinacy condition on interest rate rules is the "Taylor principle", which says that nominal interest rates should respond more than hundred percent to inflation. Unfortunately, notably because interest rates must be positive, the Taylor principle cannot be satisfied for all inflation rates, and as a consequence global determinacy may not prevail even though there exists a locally determinate equilibrium. We propose here a simple alternative to the Taylor principle, which takes the form of a new condition on interest rate rules that ensures global determinacy. An important feature of the policy package is that it does not rely at all on any of the fiscal policies associated with the "fiscal theory of the price level", which was so far the main alternative for determinacy.

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Paper provided by PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2007-35.

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Date of creation: 2007
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Handle: RePEc:pse:psecon:2007-35

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  5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39, pages 195-214, December. [Downloadable!] (restricted)
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  8. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
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