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Interest rate rules, inflation and the Taylor principle: An analytical exploration

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  • Jean-Pascal Bénassy

    (CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres, PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the "Taylor principle", according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.

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  • Jean-Pascal Bénassy, 2005. "Interest rate rules, inflation and the Taylor principle: An analytical exploration," PSE Working Papers halshs-00590564, HAL.
    • Handle: RePEc:hal:psewpa:halshs-00590564
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00590564
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    References listed on IDEAS

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    Cited by:

    1. ZHENG, Tingguo & WANG, Xia & GUO, Huiming, 2012. "Estimating forward-looking rules for China's Monetary Policy: A regime-switching perspective," China Economic Review, Elsevier, vol. 23(1), pages 47-59.
    2. Qiong Li & Zhiwei Wang, 2010. "The Taylor rules and macroeconomic fluctuation in China: 1994–2006," Frontiers of Economics in China, Springer;Higher Education Press, vol. 5(2), pages 232-253, June.
    3. Bénassy, Jean-Pascal, 2008. "Employment targeting," Economics Letters, Elsevier, vol. 99(2), pages 320-323, May.

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