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Working Paper

Taylor Rules in a Limited Participation Model

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We use the limited participation model of money as a laboratory for studying the operating characteristics of Taylor rules for setting the rate of interest. Rules are evaluated 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 for a rule which: (i) raises the nominal interest rate more than one-for-one with a rise in inflation; and (ii) does not change the interest rate in response to a change in output relative to trend.
03.01.1999ISSN 2573-7953 WP 99-02DOI 10.26509/frbc-wp-199902
JEL Classification Codes E1, E4, E52, E58

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Christiano, Lawrence, and Christopher Gust. 1999. “Taylor Rules in a Limited Participation Model.” Federal Reserve Bank of Cleveland, Working Paper No. 99-02. https://doi.org/10.26509/frbc-wp-199902