Inflation determination with Taylor rules
Subtitle: a critical review
By: John H. Cochrane.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- no. 13409.; Working paper series (National Bureau of Economic Research) -- working paper no. 13409.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 48
Subjects: Inflation (Finance) -- Mathematical models; Keynesian economics
Description: The new-Keynesian, Taylor-rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly stabilize future inflation. Rather, the Fed threatens hyperinflation, unless inflation jumps to one particular value on each date. However, there is nothing in economics to rule out hyperinflationary or deflationary solutions. Therefore, inflation is just as indeterminate under "active" interest rate targets as it is under standard fixed interest rate targets. Inflation determination requires ingredients beyond an interest-rate policy that follows the Taylor principle.
Notes: "September 2007"

Includes bibliographical references (p. 45-48).

Also available in PDF from the NBER world wide web site (www.nber.org).