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Trend Inflation, Taylor Principle and Indeterminacy

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We show that low trend in‡ation strongly a¤ects the dynamics of a standard Neo-Keynesian model where monetary policy is described by a standard Taylor rule. Moreover, trend in‡ation 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 in‡ation in both theoretical and empirical analysis.

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Guido Ascari, Tiziano Ropele

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Adapt according to the presented license agreement and reference the original author.