Trend Inflation, Taylor Principle and Indeterminacy

We show that low trend inflation strongly a¤ects 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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Year of publication:	2007
Authors:	Ascari, Guido ; Ropele, Tiziano
Publisher:	Kiel : Kiel Institute for the World Economy (IfW)
Subject:	Preisrigidität \| Inflation \| Taylor-Regel \| New-Keynesian Phillips Curve \| Theorie \| Sticky Prices \| Taylor Rules and Trend Inflation

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Series:	Kiel Working Paper ; 1332
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	534868738 [GVK] hdl:10419/17848 [Handle] RePEc:zbw:ifwkwp:1332 [RePEc]
Classification:	E52 - Monetary Policy (Targets, Instruments, and Effects) ; E31 - Price Level; Inflation; Deflation
Source:	EconStor