Abstract
We use the limited participation model of money as a laboratory for studying the operating characteristics of Taylor rules for setting the rate of interest. Rules are evaluated according to their ability to protect the economy from bad outcomes such as the burst of inflation observed in the 1970s. Based on our analysis, we argue for a rule which: (i) raises the nominal interest rate more than one-for-one with a rise in inflation; and (ii) does not change the interest rate in response to a change in output relative to trend.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 437-460 |
| Number of pages | 24 |
| Journal | Economist |
| Volume | 147 |
| Issue number | 4 |
| DOIs | |
| State | Published - 1999 |
Funding
* We are grateful for the perceptive comments of an anonymous referee. Portions of this document are reprinted, with the permission of the University of Chicago Press, from a comment by us in Taylor (1999a). The first author is grateful to the National Science Foundation for a grant to the National Bureau of Economic Research. The contents of this paper do not reflect the views of the Federal Reserve Board. ** Department of Economics, Northwestern University, and Federal Reserve Board, respectively.
Keywords
- Monetary policy
- Non-neutrality of money
- Taylor rule
ASJC Scopus subject areas
- Economics and Econometrics