Taylor Rules in a Limited Participation Model
نویسندگان
چکیده
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 in°ation observed in the 1970s. 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 in°ation; and (ii) does not change the interest rate in response to a change in output relative to trend. JEL numbers: E1, E4, E52, E58 ¤Portions of this document are reprinted, with the permission of the University of Chicago Press, from a comment by us that is forthcoming in Taylor (1999a). The ̄rst author is grateful to the National Science Foundation for a grant to the National Bureau of Economic Research.
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