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The Incredible Taylor Principle

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Abstract

This paper discusses the extent to which the Taylor principle can solve the indeterminacy of equilibria in economies where the monetary authority follows an interest rate feedback rule. We first show that only the limiting behavior of the feedback rule matters, so identifying in the data if the Taylor principle holds cannot be achieved. Second, we show that the competitive equilibrium under interest rate feedback rules is nominally determined if the Taylor principle holds and, in addition, two ad-hoc restrictions on equilibrium are satisfied. These require equilibrium inflation to be bounded and equilibria to be locally unique. Finally, we show that the Taylor principle is strongly time inconsistent, in a sense we make very precise.

Suggested Citation

  • Pablo Andrés Neumeyer & Juan Pablo Nicolini, 2024. "The Incredible Taylor Principle," Staff Report 658, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:98596
    DOI: 10.21034/sr.658
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    Keywords

    Taylor principle; Uniqueness of equilibrium; Time consistency;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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