Forward-Looking Versus Backward-Looking Taylor Rules
WP 00-09 |
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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.