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Taylor Rules in a Limited Participation ModelLawrence J. ChristianoNorthwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER) Christopher J. GustFederal Reserve Board - Trade and Financial Studies March 1999 NBER Working Paper No. w7017 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.
Number of Pages in PDF File: 28 working papers seriesDate posted: June 8, 1999Suggested CitationContact Information
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