Business Intelligence

The Taylor Principle In A Medium-scale Macroeconomic Model

Download Now Free registration required

Executive Summary

The Taylor Principle is often used to explain macroeconomic stability (see, e.g., Clarida et al. 2000). The reason is that this simple principle guarantees determinacy, i.e., local uniqueness of rational expectations equilibrium, in many New Keynesian models. However, analyses of determinacy are generally conducted in the context of highly stylized models. In the present paper, the authors use a medium-scale model which combines features that have been shown to explain fairly well postwar U.S. business cycles. The main result demonstrates that the stability properties of forward-looking interest rate rules are very similar to the corresponding outcomes under current-looking rules.

  • Format: PDF
  • Size: 586.02 KB