Taylor Rules in a Limited Participation Model

28 Pages Posted: 8 Jun 1999  

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

Date Written: March 1999

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.

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

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)

Federal Reserve Bank of Cleveland

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Cleveland, OH 44101-1387
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Federal Reserve Bank of Chicago

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Chicago, IL 60604
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Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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