28 Pages Posted: 8 Jun 1999 Last revised: 12 Oct 2010
Date Written: March 1999
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.
Suggested Citation: Suggested Citation
Christiano, Lawrence J. and Gust, Christopher J., Taylor Rules in a Limited Participation Model (March 1999). NBER Working Paper No. w7017. Available at SSRN: https://ssrn.com/abstract=155555