Price Indexation, Habit Formation, and the Generalized Taylor Principle

16 Pages Posted: 2 Aug 2013 Last revised: 31 Jul 2015

See all articles by Saroj Bhattarai

Saroj Bhattarai

Pennsylvania State University - Department of Economics

Jae Won Lee

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences - New Brunswick/Piscataway - Department of Economics

Woong Yong Park

Seoul National University

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Date Written: September 18, 2014

Abstract

We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with positive steady-state inflation, interest rate smoothing in monetary policy, partial dynamic price indexation, and habit formation in consumption.

Keywords: Determinacy, Generalized Taylor Principle, Sticky prices, Price indexation, Habit formation, Steady-state inflation

JEL Classification: E31, E52, E58

Suggested Citation

Bhattarai, Saroj and Lee, Jae Won and Park, Woong Yong, Price Indexation, Habit Formation, and the Generalized Taylor Principle (September 18, 2014). Available at SSRN: https://ssrn.com/abstract=2304546 or http://dx.doi.org/10.2139/ssrn.2304546

Saroj Bhattarai

Pennsylvania State University - Department of Economics ( email )

Harrisburg, PA
United States

Jae Won Lee

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences - New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Woong Yong Park (Contact Author)

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

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