Unique Monetary Equilibria With Interest Rate Rules
Source: Banco de Portugal
Central banks in developed economies have been very successful in targeting low inflation in the last twenty years. The success is commonly attributed to central banks following some form of a Taylor (1993) rule where the short term nominal interest rate responds to inflation, to be raised when inflation is above target and lowered when it is below target, with a low target for inflation. Interest rate feedback rules of this type, have been extensively studied in the literature since Sargent and Wallace (1975) and McCallum (1981). Nevertheless, the interest rate rules proposed in the literature are unable to achieve in a monetary model what interest rate policy seems to achieve in reality.