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The Incredible Taylor Principle

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  • Pablo Andrés Neumeyer
  • Juan Pablo Nicolini

Abstract

We discuss the extent to which the Taylor principle can solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate feedback rule. We first show that only the limiting behavior of the feedback rule matters, so identifying in the data if the Taylor principle holds cannot be achieved, above and beyond the arguments specified in Cochrane (2008). Second, we show that the competitive equilibrium under interest rate feedback rules is nominally determined if the Taylor principle holds and, in addition, two ad-hoc restrictions on equilibrium are satisfied. These require equilibrium inflation to be bounded and equilibria to be locally unique. Finally, we show that the Taylor principle is strongly time inconsistent, in a sense we make very precise.

Suggested Citation

  • Pablo Andrés Neumeyer & Juan Pablo Nicolini, 2024. "The Incredible Taylor Principle," Department of Economics Working Papers 2025_07, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2025_07
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    References listed on IDEAS

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
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    4. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565-615.
    5. Fernando Alvarez & Patrick J. Kehoe & Pablo Andrés Neumeyer, 2004. "The Time Consistency of Optimal Monetary and Fiscal Policies," Econometrica, Econometric Society, vol. 72(2), pages 541-567, March.
    6. 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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    8. Fernando Alvarez & Martin Beraja & Martín Gonzalez-Rozada & Pablo Andrés Neumeyer, 2019. "From Hyperinflation to Stable Prices: Argentina’s Evidence on Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(1), pages 451-505.
    9. Andrew Atkeson & Varadarajan V. Chari & Patrick J. Kehoe, 2010. "Sophisticated Monetary Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 47-89.
    10. Tack Yun, 2005. "Optimal Monetary Policy with Relative Price Distortions," American Economic Review, American Economic Association, vol. 95(1), pages 89-109, March.
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