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Price Indexation, Habit Formation, and the Generalized Taylor Principle

  • Saroj Bhattarai
  • Jae Won Lee
  • Woong Yong Park

We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with positive steady-state inflation, interest rate smoothing in monetary policy, partial dynamic price indexation, and habit formation in consumption.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2013-08/52_2013_bhattarai_lee_park.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-52.

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Length: 24 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-52
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  1. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," NBER Working Papers 14621, National Bureau of Economic Research, Inc.
  2. Sveen, Tommy & Weinke, Lutz, 2007. "Firm-specific capital, nominal rigidities, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 136(1), pages 729-737, September.
  3. Sveen, Tommy & Weinke, Lutz, 2005. "New perspectives on capital, sticky prices, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 123(1), pages 21-39, July.
  4. Charles T. Carlstrom & Timothy S. Fuerst & Fabio Ghironi, 2002. "Does it matter (for equilibrium determinacy) what price index the central bank targets?," Working Paper 0202, Federal Reserve Bank of Cleveland.
  5. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
  6. Jess Benhabib & Stefano Eusepi, 2005. "The design of monetary and fiscal policy: a global perspective," Proceedings, Federal Reserve Bank of San Francisco.
  7. Thomas Lubik & Massimiliano Marzo, 2003. "An Inventory of Simple Monetary Policy Rules in a New Keynesian Macroeconomic Model," Economics Working Paper Archive 500, The Johns Hopkins University,Department of Economics.
  8. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  9. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  10. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  11. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2012. "Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data," American Economic Review, American Economic Association, vol. 102(3), pages 173-78, May.
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