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Taylor Rules in a Limited Participation Model

We use the limited participation model of money as a laboratory for studying theoperating characteristics of Taylor rules for setting the rate of interest. Rules areevaluated according to their ability to protect the economy from bad outcomes such as the burst of inflation observed in the 1970?s. Based on our analysis, we argue fora rule which: (i) raises the nominal interest rate more than one-for-one with a rise ininflation; and (ii) does not change the interest rate in response to a change in output relative to trend.

JEL numbers: E1, E4, E52, E58

Suggested citation: Christiano, Lawrence, Christopher Gust, 1999. “Taylor Rules in a Limited Participation Model,” Federal Reserve Bank of Cleveland, Working Paper, no. 99-02.

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