The Taylor principle fights back, Part I

New Keynesian models with limited asset market participation assert that under plausible conditions higher real interest rates increase aggregate demand, the Taylor principle leads to indeterminacy, and passive policy ensures a unique equilibrium. These striking results stem from the assumption that...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2013-12, Vol.37 (12), p.2771-2795
Main Author: Buffie, Edward F.
Format: Article
Language:English
Subjects:
Economic dynamics
Economic equilibrium
Economic theory
Indeterminacy
Inflation
Interest rates
Keynesian theory
Keynesianism
Limited asset market participation
Monetary policy
Real wages
Studies
Taylor principle
Taylor rule
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Summary:New Keynesian models with limited asset market participation assert that under plausible conditions higher real interest rates increase aggregate demand, the Taylor principle leads to indeterminacy, and passive policy ensures a unique equilibrium. These striking results stem from the assumption that the real wage is highly flexible. Relaxing this assumption slightly brings back the normal world where higher real interest rates reduce aggregate demand and where the Taylor principle is effectively necessary and sufficient for a unique, stable equilibrium.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2013.08.003