IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v100y2010i1p618-24.html
   My bibliography  Save this article

Generalizing the Taylor Principle: Reply

Author

Listed:
  • Troy Davig
  • Eric M. Leeper

Abstract

Farmer, Waggoner, and Zha (2009) (FWZ) show that a new Keynesian model with regime-switching monetary policy can support multiple solutions, appearing to contradict findings in Davig and Leeper (2007) (DL). The explanation is straightforward: FWZ derive solutions using a model that differs from the one to which the DL conditions apply. The FWZ solutions also require that the exogenous driving process is a function of private and policy parameters. This undermines the sharp distinctions among "deep parameters" typical of optimizing models and makes it difficult to ascribe economic interpretations to FWZ's additional solutions. (E12, E31, E43, E52)

Suggested Citation

  • Troy Davig & Eric M. Leeper, 2010. "Generalizing the Taylor Principle: Reply," American Economic Review, American Economic Association, vol. 100(1), pages 618-624, March.
    • Handle: RePEc:aea:aecrev:v:100:y:2010:i:1:p:618-24
    Note: DOI: 10.1257/aer.100.1.618
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.1.618
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sargent, Thomas J, 1981. "Interpreting Economic Time Series," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 213-248, April.
    2. Davig, Troy, 2004. "Regime-switching debt and taxation," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 837-859, May.
    3. Troy Davig & Eric M. Leeper, 2008. "Endogenous Monetary Policy Regime Change," NBER Chapters, in: NBER International Seminar on Macroeconomics 2006, pages 345-391, National Bureau of Economic Research, Inc.
    4. Noah Williams & Lars E.O. Svensson, 2005. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," Computing in Economics and Finance 2005 108, Society for Computational Economics.
    5. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    6. Troy Davig, 2016. "Phillips Curve Instability and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 233-246, February.
    7. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316, National Bureau of Economic Research, Inc.
    8. Troy Davig & Taeyoung Doh, 2014. "Monetary Policy Regime Shifts and Inflation Persistence," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 862-875, December.
    9. Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2010. "Generalizing the Taylor Principle: Comment," American Economic Review, American Economic Association, vol. 100(1), pages 608-617, March.
    10. Branch, William A. & Davig, Troy & McGough, Bruce, 2013. "Adaptive Learning In Regime-Switching Models," Macroeconomic Dynamics, Cambridge University Press, vol. 17(5), pages 998-1022, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marco Bassetto & Gherardo Gennaro Caracciolo, 2021. "Monetary/Fiscal Interactions with Forty Budget Constraints," Working Papers 788, Federal Reserve Bank of Minneapolis.
    2. Hayashi, Fumio, 2017. "The long-run Taylor principle revisited," Economics Letters, Elsevier, vol. 161(C), pages 24-26.
    3. Carvalho, Carlos Viana de & Vilela, André D., 2015. "What lf Brazil Hadn't Floated the Real in 1999?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 35(2), March.
    4. Marco Bassetto & Wei Cui, 2018. "The Fiscal Theory of the Price Level in an Environment of Low Interest Rates," 2018 Meeting Papers 574, Society for Economic Dynamics.
    5. Bassetto, Marco & Cui, Wei, 2018. "The fiscal theory of the price level in a world of low interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 5-22.
    6. Yasuo Hirose, 2008. "Monetary Policy and Sunspot Fluctuation in the U.S. and the Euro Area," Bank of Japan Working Paper Series 08-E-7, Bank of Japan.
    7. Eric Kam & John Smithin & Aqeela Tabassum, 2018. "The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model," Working Papers 074, Ryerson University, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Troy Davig & Eric Leeper, 2009. "Reply To “Generalizing The Taylor Principle: A Comment”," CAEPR Working Papers 2009-008, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    2. Troy A. Davig & Eric M. Leeper, 2009. "Reply to "Generalizing the Taylor principle": a comment," Research Working Paper RWP 09-09, Federal Reserve Bank of Kansas City.
    3. Gonzalez-Astudillo, Manuel, 2011. "Policy Rule Coefficients Driven by Latent Factors: Monetary and Fiscal Policy Interactions in an Endowment Economy," MPRA Paper 29976, University Library of Munich, Germany.
    4. Chang, Yoosoon & Maih, Junior & Tan, Fei, 2021. "Origins of monetary policy shifts: A New approach to regime switching in DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    5. Baele, Lieven & Bekaert, Geert & Cho, Seonghoon & Inghelbrecht, Koen & Moreno, Antonio, 2015. "Macroeconomic regimes," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 51-71.
    6. Dennis Wesselbaum, 2022. "Cheap Talk in a New Keynesian Model," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(3), pages 661-691, September.
    7. Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.
    8. Andrew T. Foerster, 2016. "Monetary Policy Regime Switches And Macroeconomic Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(1), pages 211-230, February.
    9. McClung, Nigel, 2020. "E-stability vis-à-vis determinacy in regime-switching models," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    10. Barthélemy, Jean & Marx, Magali, 2017. "Solving endogenous regime switching models," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 1-25.
    11. Francesco Bianchi, 2013. "Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 463-490.
    12. Andrew Foerster & Juan F. Rubio‐Ramírez & Daniel F. Waggoner & Tao Zha, 2016. "Perturbation methods for Markov‐switching dynamic stochastic general equilibrium models," Quantitative Economics, Econometric Society, vol. 7(2), pages 637-669, July.
    13. Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2011. "Minimal state variable solutions to Markov-switching rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2150-2166.
    14. Kostas Mavromatis, 2018. "U.S. Monetary Regimes and Optimal Monetary Policy in the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1441-1478, October.
    15. Francesco Bianchi & Leonardo Melosi, 2017. "Escaping the Great Recession," American Economic Review, American Economic Association, vol. 107(4), pages 1030-1058, April.
    16. Bianchi, Francesco, 2016. "Methods for measuring expectations and uncertainty in Markov-switching models," Journal of Econometrics, Elsevier, vol. 190(1), pages 79-99.
    17. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, vol. 97(3), pages 607-635, June.
    18. repec:hal:spmain:info:hdl:2441/644vfdaim38frrvbit4u0bh0ha is not listed on IDEAS
    19. Binning, Andrew & Bjørnland, Hilde C. & Maih, Junior, 2019. "Is monetary policy always effective? Incomplete interest rate pass-through in a DSGE model," Working Paper 2019/22, Norges Bank.
    20. Troy Davig, 2016. "Phillips Curve Instability and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 233-246, February.
    21. Liu, Zheng & Waggoner, Daniel F. & Zha, Tao, 2007. "Asymmetric Expectation Effects of Regime Shifts and the Great Moderation," Kiel Working Papers 1357, Kiel Institute for the World Economy (IfW Kiel).

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:100:y:2010:i:1:p:618-24. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.