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Interest Rate Rules And Global Determinacy: An Alternative To The Taylor Principle

Date Added: Apr 2011
Format: PDF

A most wellknown determinacy condition on interest rate rules is the "Taylor principle", which says that nominal interest rates should respond more than hundred percent to inflation. Unfortunately, notably because interest rates must be positive, the Taylor principle cannot be satisfied for all interest rates, and as a consequence global determinacy may not prevail even though there exists a locally determinate equilibrium. The authors propose here a simple alternative to the Taylor principle, which takes the form of a new condition on interest rate rules that ensures global determinacy.