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Interest Rate Rules, Price Determinacy and the Value of Money in a non Ricardian World

  • Jean-Pascal Benassy

    (CEPREMAP)

This article studies under which conditions interest rate rules "à la Taylor" results, which are standard in the traditional "Ricardian" taxation, Financial constraints. single dynasty of consumers: (1) a pure interest rate peg leads to nominal price indeterminacy; (2) a strong reaction (usually more than one for one) of nominal interest rates to inflation is conducive to price determinacy (the Taylor principle). This article extends the analysis to rigorous dynamic non Ricardian models. The results turn out to be quite different, since notably prices may be determinate if the interest rate responds less than one for one to inflation, and even under a pure interest rate peg. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2005.01.013
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 3 (July)
Pages: 651-667

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Handle: RePEc:red:issued:v:8:y:2005:i:3:p:651-667
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  1. Jean-Pascal Benassy, 2000. "Price Level Determinacy under a Pure Interest Rate Peg," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 194-211, January.
  2. Weil, Philippe, 1987. "Permanent budget deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 393-410, September.
  3. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "Monetary Policy and Multiple Equilibria," CEPR Discussion Papers 2316, C.E.P.R. Discussion Papers.
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  6. Ray Fair, 2001. "Estimates of the Effectiveness of Monetary Policy," Yale School of Management Working Papers ysm205, Yale School of Management, revised 01 Aug 2007.
  7. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  8. Roisland, Oistein, 2003. "Capital income taxation, equilibrium determinacy, and the Taylor principle," Economics Letters, Elsevier, vol. 81(2), pages 147-153, November.
  9. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  10. 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.
  11. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  12. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  13. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  14. 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.
  15. John B. Taylor, 1998. "Monetary policy and the long boom," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
  16. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
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