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Wicksell Versus Taylor: A Quest for Determinancy and the (IR) Relevance of the Taylor Principle

  • Sofía Bauducco
  • Rodrigo Caputo

In a new-Keynesian model we compare the determinacy regions of price-level targeting rules (called Wicksellian rules) and Taylor rules. We conclude that Wicksellian rules do not require the Taylor principle to be satisfied to induce determinacy. Moreover, the areas of determinacy are generally large under Wicksellian rules. Our results have two implications. First, estimating Taylor rules when the true rule is Wicksellian may lead to conclude that the equilibrium is indeterminate when this is not the case. Second, by following a Wicksellian rule, the frequency of occurrence of an active zero lower bound on the policy rate is greatly reduced.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 705.

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Date of creation: Sep 2013
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Handle: RePEc:chb:bcchwp:705
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