Determinacy without the Taylor Principle / George-Marios Angeletos, Chen Lian.

Format:

Book

Author/Creator:

Angeletos, George-Marios.

Contributor:

National Bureau of Economic Research.

Lian, Chen.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28881.

NBER working paper series no. w28881

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

Our understanding of monetary policy is complicated by an equilibrium-selection conundrum: because the same path for the nominal interest rate can be associated with multiple equilibrium paths for inflation and output, there is a long-standing debate about what the right equilibrium selection is. We offer a potential resolution by showing that small frictions in social memory and intertemporal coordination can remove the indeterminacy. Under our perturbations, the unique surviving equilibrium is the same as that selected by the Taylor principle, but it no more relies on it; monetary policy is left to play only a stabilization role; and fiscal policy needs to be Ricardian, even when monetary policy is passive.

Notes:

Print version record

June 2021.