Price Indexation, Habit Formation, and the Generalized Taylor Principle

24 Pages Posted: 20 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). CAMA Working Paper Series Paper 52/2013, Available at SSRN: https://ssrn.com/abstract=2312227 or http://dx.doi.org/10.2139/ssrn.2312227

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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