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Forward-looking versus backward-looking Taylor rules

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  • Charles T. Carlstrom
  • Timothy S. Fuerst

Abstract

This paper analyzes the restrictions necessary to ensure that the policy rule used by the central bank does not introduce real indeterminacy into the economy. It conducts this analysis in a flexible price economy and a sticky price model. A robust conclusion is that to ensure determinacy, the monetary authority should follow a backward-looking rule where the nominal interest rate responds aggressively to past inflation rates.

Suggested Citation

  • Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Papers (Old Series) 0009, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0009
    DOI: 10.26509/frbc-wp-200009
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    2. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 767-789, October.
    3. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
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    9. repec:nbr:nberre:0126 is not listed on IDEAS
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