Stabilising Taylor rules when the supply shock has a unit root

This paper studies the implication of unit root supply shocks for the Taylor rule. I find that, when supply shocks have a unit root, if a central bank wishes to guarantee the stationarity of inflation, then their interest rate reaction function should not respond to the output gap. Once the stationarity of inflation is guaranteed by the output-gap-response parameter, the “Taylor principle” can be applied for warranting determinacy of the dynamics.

MoreLess

Year of publication:	2014
Authors:	Yao, Fang
Published in:	Journal of Macroeconomics. - Elsevier, ISSN 0164-0704. - Vol. 41.2014, C, p. 16-20
Publisher:	Elsevier
Subject:	Inflation persistence \| Taylor rule \| Unit root

More details

Type of publication:	Article
Classification:	E30 - Prices, Business Fluctuations, and Cycles. General ; E40 - Money and Interest Rates. General ; E50 - Monetary Policy, Central Banking and the Supply of Money and Credit. General
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10011065294