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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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