The Perils of Taylor Rules

Benhabib, Jess; Schmitt–Grohé, Stephanie; Uribe, Martı́n

doi:10.2139/ssrn.171749

Cited by 236 publications

(369 citation statements)

References 24 publications

Supporting

Mentioning

352

Contrasting

Unclassified

Order By: Relevance

“…Fair (2003) argues that the Taylor principle cannot guarantee determinacy if aggregate demand responds to nominal interest rates and inflation has a negative effect on consumption. Benhabib et al (2001) find that the Taylor principle does not necessarily lead to determinate REE when there is zero bound on nominal rates. All these works focus on the determinacy of the REE.…”

Section: Introductionmentioning

confidence: 79%

See 1 more Smart Citation

Increasing Returns and the Design of Interest Rate Rules

Xiao

2007

Macroecon. Dynam.

View full text Add to dashboard Cite

We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the "Taylor principle" no longer guarantees either determinacy or E-stability of the rational expectations equilibrium.

show abstract

Section: Introductionmentioning

confidence: 79%

“…5 The parameter vectors a and ψ will have to be learned. Given this PLM, we calculate the forward expectation of z t as Plugging this expression into (34), we obtain the T-mapping from (a, ψ) 0 to combinations of the true parameters of the model.…”

Section: General Methodologymentioning

confidence: 99%

Increasing Returns and the Design of Interest Rate Rules

Xiao

2007

Macroecon. Dynam.

View full text Add to dashboard Cite

show abstract

“…Unfortunately, the existence of a local determinate equilibrium does not rule out the possibility of multiple equilibria at the global level (see e.g. Schmitt-Grohé and Uribe, 2000;Benhabib et al, 2001;Ascari and Ropele, 2009). This is a serious issue because there is always the possibility, e.g.…”

Section: Theoretical Issuesmentioning

confidence: 99%

Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead

Fagiolo

Roventini

2016

SSRN Journal

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe Great Recession seems to be a natural experiment for economic analysis, in that it has shown the inadequacy of the predominant theoretical framework -the New Neoclassical Synthesis (NNS) -grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue should escape the strong theoretical requirements of NNS models (e.g., equilibrium, rationality, representative agent, etc.) and consider the economy as a complex evolving system, i.e. as an ecology populated by heterogenous agents, whose far-from-equilibrium interactions continuously change the structure of the system. This is indeed the methodological core of agent-based computational economics (ACE), which is presented in this paper. We also discuss how ACE has been applied to policy analysis issues, and we provide a survey of macroeconomic policy applications (fiscal and monetary policy, bank regulation, labor market structural reforms and climate change interventions). Finally, we conclude by discussing the methodological status of ACE, as well as the problems it raises.

show abstract

“…Notably there is the well-known proposition, linked to the name of John Taylor, which suggests that anything more than an equiproportional increase in the short-term interest rate, following an increase in in ‡ation, is su¢ cient to ensure a unique REE. 1 We note that this proposition is subject to the lacunae that fully characterized stabilization policy requires consideration of both monetary and …scal policy. This insight is of particular interest when monetary policy is constrained in some manner, for example because of a zero lower bound or when …scal policy adopts a particularly aggressive approach to output stabilization.…”

Section: Introductionmentioning

confidence: 99%

“…2 Recent work on simple policy rules has shown that an optimal monetary and …scal policy should respond systematically to in ‡ation and output, respectively, as this will stabilize the economy well. 3 But as well as establishing 1 The seminal contributions we have in mind are Taylor (1993) and (1999). In a number of important contributions Benhabib, Schmitt-Grohé and Uribe (2001,2002) and Schmitt-Grohé and Uribe (2000) have criticized the universality of the 'Taylor principle'both in terms of local rather than global stability analysis, and the need to take account of structural non-linearities, such as the zero bound on nominal interest rates when formulating optimal monetary policy.…”

Section: Introductionmentioning

confidence: 99%

Policy rules under the monetary and the fiscal theories of the price-level

Chadha

2011

Macroeconomics and Finance in Emerging Market Economies

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Price-level determination requires co-ordination of monetary and …scal policy to ensure a unique rational expectations equilibrium (REE). This paper derives a number of implications for simple interest rate rules resulting from various …scal strategies. We show that …scal choices under either the monetary theory of the price-level (MTPL) and the …scal theory of the price-level (FTPL) can challenge widely accepted principles of monetary policy. Speci…cally, we show that a …scal rule that responds aggressively to output and in ‡ation may force the monetary authorities to adopt signi…cantly more aggressive output and in ‡ation stabilization policy than suggested by the Taylor Principle. We also show how when monetary policy is severely constrained, the …scal policy maker can act to stabilise the economy. Some policy conclusions in light of the lower zero bound for monetary policy and debt stabilization are drawn. Terms of use: Documents in EconStor mayJEL Classi…cation: E21; E32; E52; E63.

show abstract

The Perils of Taylor Rules

Cited by 236 publications

References 24 publications

Increasing Returns and the Design of Interest Rate Rules

Increasing Returns and the Design of Interest Rate Rules

Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead

Policy rules under the monetary and the fiscal theories of the price-level

Contact Info

Product

Resources

About