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Determinacy without the Taylor Principle

Author

Listed:
  • George-Marios Angeletos
  • Chen Lian

Abstract

Our understanding of monetary policy is complicated by an indeterminacy problem: the same path for the nominal interest rate is consistent with multiple equilibrium paths for inflation and output. We offer a potential resolution by showing that small frictions in social memory and intertemporal coordination can remove this indeterminacy. Under our perturbations, the unique equilibrium is the same as that selected by the Taylor principle, but it no more relies on it; monetary policy is left to play only a stabilization role; and fiscal policy needs to be Ricardian even when monetary policy is passive.

Suggested Citation

  • George-Marios Angeletos & Chen Lian, 2023. "Determinacy without the Taylor Principle," Journal of Political Economy, University of Chicago Press, vol. 131(8), pages 2125-2164.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/723634
    DOI: 10.1086/723634
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    Cited by:

    1. J․ Adams, Jonathan, 2026. "Equilibrium determinacy with behavioral expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 183(C).
    2. Bartal, Mehdi & Becard, Yvan, 2024. "Consumption tax cuts vs stimulus payments," Journal of Public Economics, Elsevier, vol. 239(C).
    3. Kokonas, Nikolaos & Rousakis, Michalis & Smyrniotis, Efthymios, 2025. "Controlling inflation with central bank news," European Economic Review, Elsevier, vol. 180(C).
    4. Ascari, Guido & Mavroeidis, Sophocles & McClung, Nigel, 2023. "Coherence without rationality at the zero lower bound," Journal of Economic Theory, Elsevier, vol. 214(C).
    5. Elfsbacka Schmöller, Michaela & McClung, Nigel, 2024. "Can growth stabilize debt? A fiscal theory perspective," Bank of Finland Research Discussion Papers 2/2024, Bank of Finland, revised 2024.
    6. George‐Marios Angeletos & Chen Lian & Christian K. Wolf, 2024. "Can Deficits Finance Themselves?," Econometrica, Econometric Society, vol. 92(5), pages 1351-1390, September.
    7. Roulleau-Pasdeloup, Jordan, 2023. "Analyzing Linear DSGE models: the Method of Undetermined Markov States," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    8. Tom D. Holden, 2024. "Robust Real Rate Rules," Econometrica, Econometric Society, vol. 92(5), pages 1521-1551, September.
    9. Jonathan J Adams, 2024. "Optimal Policy Without Rational Expectations: A Sufficient Statistic Solution," Working Papers 001011, University of Florida, Department of Economics.
    10. Jonathan Adams & Philip Barrett, 2024. "Shocks to Inflation Expectations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 54, October.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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