The Taylor Principle in a Medium-Scale Macroeconomic Model

25 Pages Posted: 9 Jul 2010

See all articles by Tommy Sveen

Tommy Sveen

Norges Bank - Research Department

Lutz Weinke

Independent

Date Written: May 28, 2010

Abstract

The Taylor Principle is often used to explain macroeconomic stability (see, e.g., Clarida et al. 2000). The reason is that this simple principle guarantees determinacy, i.e., local uniqueness of rational expectations equilibrium, in many New Keynesian models. However, analyses of determinacy are generally conducted in the context of highly stylized models. In the present paper we use a medium-scale model which combines features that have been shown to explain fairly well postwar U.S. business cycles. Our main result demonstrates that the stability properties of forward-looking interest rate rules are very similar to the corresponding outcomes under current-looking rules. This is in stark contrast with many findings that have been obtained in the context of models whose empirical relevance is limited.

Keywords: Nominal Rigidities, Real Rigidities, Monetary Policy

JEL Classification: E22, E31

Suggested Citation

Sveen, Tommy and Weinke, Lutz, The Taylor Principle in a Medium-Scale Macroeconomic Model (May 28, 2010). Norges Bank Working Paper No. 2010/09. Available at SSRN: https://ssrn.com/abstract=1636721 or http://dx.doi.org/10.2139/ssrn.1636721

Tommy Sveen (Contact Author)

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Lutz Weinke

Independent

No Address Available

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