Kiel Working Papers, Kiel Institute for World Economics
No 1332:
Trend Inflation, Taylor Principle and Indeterminacy
Guido Ascari and Tiziano Ropele
Abstract: 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. 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.
Keywords: Sticky Prices, Taylor Rules and Trend Inflation; (follow links to similar papers)
JEL-Codes: E31,; E52; (follow links to similar papers)
30 pages, June 2007
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