IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Trend Inflation, Taylor Principle, and Indeterminacy

  • GUIDO ASCARI
  • TIZIANO ROPELE

Positive trend inflation shrinks the determinacy region of a basic New Keynesian dynamic stochastic general equilibrium model when monetary policy is conducted by a contemporaneous interest rate rule. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, which requires that the nominal interest rate to be raised by more than the increase in inflation in the long run, is a sufficient condition for local determinacy of equilibrium. This finding holds for different types of Taylor rules, inertial policy rules, and price indexation schemes. Therefore, regardless of the theoretical setup, the monetary literature on interest rate rules cannot disregard average inflation in both theoretical and empirical analyses. Copyright (c) 2009 The Ohio State University.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2009.00272.x
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 8 (December)
Pages: 1557-1584

as
in new window

Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:8:p:1557-1584
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Michael Kiley, 2004. "Is Moderate-To-High Inflation Inherently Unstable?," Econometric Society 2004 North American Summer Meetings 193, Econometric Society.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  3. Jean-Guillaume Sahuc, 2004. "Partial Indexation, Trend Inflation, and the Hybrid Phillips Curve," Documents de recherche 04-05, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  4. Robert Amano & Steve Ambler & Nooman Rebei, 2006. "The Macroeconomic Effects of Non-Zero Trend Inflation," Staff Working Papers 06-34, Bank of Canada.
  5. Ascari, Guido, 2003. "Staggered prices and trend inflation : Some nuisances," Research Discussion Papers 27/2003, Bank of Finland.
  6. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  7. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
  8. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "Optimal monetary policy," Working Papers 01-5, Federal Reserve Bank of Philadelphia.
  9. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  10. Argia M. Sbordone & Timothy Cogley, 2004. "A Search for a Structural Phillips Curve," Computing in Economics and Finance 2004 291, Society for Computational Economics.
  11. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  12. Marika Karanassou & Hector Sala & Dennis J. Snower, 2002. "A Reappraisal of the Inflation-Unemployment Tradeoff," Working Papers 479, Queen Mary University of London, School of Economics and Finance.
  13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  14. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
  15. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  16. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  17. Ascari, Guido & Ropele, Tiziano, 2007. "Optimal monetary policy under low trend inflation," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2568-2583, November.
  18. Andreas Hornstein & Alexander L. Wolman, 2005. "Trend inflation, firm-specific capital, and sticky prices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 57-83.
  19. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  20. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the US Business Cycle," CEPR Discussion Papers 4654, C.E.P.R. Discussion Papers.
  21. Ascari, Guido, 1998. "Superneutrality Of Money In Staggered Wage-Setting Models," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 383-400, September.
  22. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  23. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  24. Graham, Liam & Snower, Dennis J., 2004. "The real effects of money growth in dynamic general equilibrium," Working Paper Series 0412, European Central Bank.
  25. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  26. Graham, Liam & Snower, Dennis J., 2007. "Hyperbolic discounting and the Phillips curve," Kiel Working Papers 1346, Kiel Institute for the World Economy (IfW).
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:41:y:2009:i:8:p:1557-1584. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

or (Christopher F. Baum)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.