Wicksellian Rules and the Taylor Principle: Some Practical Implications*

Abstract

In this paper, we derive and compare the determinacy regions of price‐level targeting rules (Wicksellian rules) and Taylor rules in a standard New Keynesian model. We conclude that Wicksellian rules do not require the Taylor principle to hold in order to induce determinacy. Our results have two implications. First, in a univariate setting, the estimation of simple Taylor rules when the true rule is Wicksellian can lead to the erroneous conclusion that the equilibrium is indeterminate. Second, indeterminacy is ruled out when using system‐based methods, but it can be concluded that the central bank is less averse to inflation movements than it actually is.

Sectoral Labor Mobility and Optimal Monetary Policy

“…First, Giannoni (2014) demonstrates that any price level rule with positive coefficients yields a determinate equilibrium. In addition, Bauducco and Caputo (2020) show that price-level targeting rules do not require the Taylor principle to be satisfied for determinacy to hold. Whenever we find that the optimal monetary policy is characterized by an inertial rule (with ρ r < 1), we find that the Taylor principle is satisfied.…”

Information Value of the Interest Rate and the Zero Lower Bound

“…The specification of the interest rate rule is not essential for motivating and studying the information problem at the zero lower bound as long as the relationship between the nominal interest rate and the unobservables is linear. A promising alternative is the Wicksellian price level targeting rule i t = ψ p p t + ψ x x t where p t is the price level [see Bauducco and Caputo (2018)]. It has the advantage of achieving local determinacy in the monetary policy parameter region where the Taylor rule violates it.…”