Price Indexation, Habit Formation, and the Generalized Taylor Principle
24 Pages Posted: 20 Aug 2013 Last revised: 31 Jul 2015
Date Written: September 18, 2014
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: Suggested Citation