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Forward-Looking Versus Backward-Looking Taylor Rules

08.01.00

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: Carlstrom, Charles T., and Timothy S. Fuerst, 2000. “Forward-Looking Versus Backward-Looking Taylor Rules,” Federal Reserve Bank of Cleveland, Working Paper, no. 00-09.

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