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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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File URL: https://www.ifw-members.ifw-kiel.de/publications/trend-inflation-taylor-principle-and-indeterminacy/kap1332.pdf
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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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  1. Graham, Liam & Snower, Dennis J., 2004. "The real effects of money growth in dynamic general equilibrium," Working Paper Series 0412, European Central Bank.
  2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  10. Sahuc, Jean-Guillaume, 2006. "Partial indexation, trend inflation, and the hybrid Phillips curve," Economics Letters, Elsevier, vol. 90(1), pages 42-50, January.
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  14. Graham, Liam & Snower, Dennis J., 2008. "Hyperbolic Discounting and the Phillips Curve," IZA Discussion Papers 3477, Institute for the Study of Labor (IZA).
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  16. Ascari, Guido, 2002. "Staggered Price and Trend Inflation:Some Nuisances," Royal Economic Society Annual Conference 2002 10, Royal Economic Society.
  17. Guido Ascari & Tiziano Ropele, 2007. "Optimal monetary policy under low trend inflation," Temi di discussione (Economic working papers) 647, Bank of Italy, Economic Research and International Relations Area.
  18. Robert Amano & Steve Ambler & Nooman Rebei, 2006. "The Macroeconomic Effects of Non-Zero Trend Inflation," Working Papers 06-34, Bank of Canada.
  19. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  20. Andreas Hornstein & Alexander L. Wolman, 2005. "Trend inflation, firm-specific capital, and sticky prices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 57-83.
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  23. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
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