Taylor-Type Rules and Permanent Shifts in Productivity Growth

Federal Reserve Bank of St. Louis Working Paper No. 2009-049A

29 Pages Posted: 1 Oct 2009

See all articles by William T. Gavin

William T. Gavin

Federal Reserve Bank of St. Louis - Research Division; University of Memphis Department of Economics

Benjamin D. Keen

University of Oklahoma - Department of Economics

Michael R. Pakko

Arkansas Economic Development Institute

Date Written: September 30, 2009

Abstract

This paper examines the impact of a permanent shock to the productivity growth rate in a New Keynesian model when the central bank does not immediately adjust its policy rule to that shock. Our results show that inflation and productivity growth are negatively correlated at business cycle frequencies when the central bank follows a Taylor-type policy rule that targets the output gap. We then demonstrate that inflation is more stable after a permanent productivity shock when monetary policy targets the output growth rate (not the output gap) or the price-level path (not the inflation rate). As for the welfare implications, both the output growth and price-level path rules generate much less volatility in output and inflation after a productivity shock than occurs with the Taylor rule.

Keywords: Inflation Dynamics, Permanent Productivity Shocks, Nominal Interest Rate Rules

JEL Classification: E30, E42, E58

Suggested Citation

Gavin, William T. and Keen, Benjamin D. and Pakko, Michael R., Taylor-Type Rules and Permanent Shifts in Productivity Growth (September 30, 2009). Federal Reserve Bank of St. Louis Working Paper No. 2009-049A, Available at SSRN: https://ssrn.com/abstract=1480730 or http://dx.doi.org/10.2139/ssrn.1480730

William T. Gavin (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

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HOME PAGE: http://www.gavinecon.com

University of Memphis Department of Economics ( email )

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Benjamin D. Keen

University of Oklahoma - Department of Economics ( email )

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Michael R. Pakko

Arkansas Economic Development Institute ( email )

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Little Rock, AR 72204
United States
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501-569-8538 (Fax)

HOME PAGE: http://https://ualr.edu/aedi/

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