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Trend Inflation, Taylor Principle and Indeterminacy

  • Guido Ascari

    ()

    (University of Pavia)

  • Tiziano Ropele

    ()

    (Department of Economics, University of Milan-Bicocca)

In this paper, 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. In particular, we show that trend inflation: (i) enlarges the indeterminacy region in the parameter space, substantially altering the so-called Taylor principle; (ii) changes the dynamic responses of the economy. Furthermore, we generalize the basic analysis to different types of Taylor rules, inertial policy rules and indexation schemes. The key point 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: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper93.pdf
File Function: First version, 2005
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 93.

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Length: 63 pages
Date of creation: Oct 2005
Date of revision: Oct 2005
Handle: RePEc:mib:wpaper:93
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  13. 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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  18. Timothy Cogley & Argia M. Sbordone, 2005. "A search for a structural Phillips curve," Staff Reports 203, Federal Reserve Bank of New York.
  19. Sahuc, J-G., 2004. "Partial Indexation, Trend Inflation, and the Hybrid Phillips Curve," Working papers 118, Banque de France.
  20. 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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