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Working Paper

Taylor Rules in a Model that Satisfies the Natural Rate Hypothesis

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This paper analyzes the restrictions necessary to ensure that the interest rate 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 that satisfies the natural rate hypothesis. A necessary and sufficient condition for real determinacy in the sticky price model is for there to be nominal and real determinacy in the corresponding flexible price model. This arises if and only if the Taylor rule responds aggressively to lagged inflation rates.
10.01.2001ISSN 2573-7953 WP 01-16DOI 10.26509/frbc-wp-200116
Keywords general equilibrium, money and interest rates, monetary policy
JEL Classification Codes D51, E42, E52

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

Carlstrom, Charles T., and Timothy S. Fuerst. 2001. “Taylor Rules in a Model that Satisfies the Natural Rate Hypothesis.” Federal Reserve Bank of Cleveland, Working Paper No. 01-16. https://doi.org/10.26509/frbc-wp-200116