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Tinbergen Rules the Taylor Rule

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  • Thomas R. Michl

Abstract

This paper elaborates a simple model of growth with a Taylor-like monetary policy rule that includes inflation targeting as a special case. When the inflation process originates in the product market, inflation targeting locks in the unemployment rate prevailing at the time the policy matures. Even though there is an apparent NAIRU and Phillips curve, this long-run position depends on initial conditions; in the presence of stochastic shocks, it would be path dependent. Even with an employment target in the Taylor Rule, the monetary authority will generally achieve a steady state that misses both its targets since there are multiple equilibria. With only one policy instrument, Tinbergen's Rule dictates that policy can only achieve one goal, which can take the form of a linear combination of the two targets.

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  • Thomas R. Michl, 2006. "Tinbergen Rules the Taylor Rule," Economics Working Paper Archive wp_444, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_444
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    Cited by:

    1. Guillermo Gigliani, 2014. "The Reform of the Federal Reserve in 2008: Is the Money Supply Endogenous or Exogenous?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(71), pages 73-94, December.
    2. J.W. Mason & Arjun Jayadev, 2015. "Lost in Fiscal Space: Some Simple Analytics of Macroeconomic Policy in the Spirit of Tinbergen, Wicksell and Lerner," Working Papers 2015_05, University of Massachusetts Boston, Economics Department.
    3. Amitava Krishna Dutt, 2010. "Reconciling the Growth of Aggregate Demand and Aggregate Supply," Chapters,in: Handbook of Alternative Theories of Economic Growth, chapter 11 Edward Elgar Publishing.
    4. Hiroaki Sasaki, 2016. "Increased Shareholder Power, Income Distribution, and Employment in a Neo-Kaleckian Model with Conflict Inflation," Discussion papers e-16-008, Graduate School of Economics , Kyoto University.
    5. Thomas R. Michl, 2013. "Public debt, growth, and distribution," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(1), pages 120-144, January.

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