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Taylor Rules in a Limited Participation Model

1999; Linguagem: Inglês

10.26509/frbc-wp-199902

2573-7953

Lawrence J. Christiano, Christopher Gust,

Economic Theory and Policy

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 1970's. Based on our analysis, we argue fora 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.