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Trend Inflation, Taylor Principle and Indeterminacy

  • Guido Ascari
  • Tiziano Ropele

We show that low trend inflation strongly affects the dynamics of a standard Neo-Keynesian model where monetary policy is described by a standard Taylor rule. Moreover, trend inflation enlarges the indeterminacy region in the parameter space, substantially altering the so-called Taylor principle. The main results hold for di¤erent types of Taylor rules, inertial policy rules and indexation schemes. The key message is that, whatever the set up, the literature on Taylor rules cannot disregard average inflation in both theoretical and empirical analysis.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1332.

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Length: 30 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:kie:kieliw:1332
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  4. Robert Amano & Steve Ambler & Nooman Rebei, 2007. "The Macroeconomic Effects of Nonzero Trend Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1821-1838, October.
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  18. Sahuc, J-G., 2004. "Partial Indexation, Trend Inflation, and the Hybrid Phillips Curve," Working papers 118, Banque de France.
  19. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the U.S. Business Cycle," NBER Working Papers 10724, National Bureau of Economic Research, Inc.
  20. Ascari, Guido & Ropele, Tiziano, 2007. "Optimal monetary policy under low trend inflation," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2568-2583, November.
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