TY  - JOUR
AU  - Davig,Troy
AU  - Leeper,Eric M.
TI  - Generalizing the Taylor Principle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11874
PY  - 2005
Y2  - December 2005
UR  - http://www.nber.org/papers/w11874
L1  - http://www.nber.org/papers/w11874.pdf
N1  - Author contact info:
Troy Davig
Barclays Capital
E-Mail: Troy.Davig@barclayscapital.com

Eric M. Leeper
Department of Economics
304 Wylie Hall
Indiana University
Bloomington, IN  47405
Tel: 812/855-9157
Fax: NA
E-Mail: eleeper@indiana.edu
AB  - The paper generalizes the Taylor principle---the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation---to an environment in which reaction coefficients in the monetary policy rule evolve according to a Markov process. We derive a long-run Taylor principle that delivers unique bounded equilibria in two standard models. Policy can satisfy the Taylor principle in the long run, even while deviating from it substantially for brief periods or modestly for prolonged periods. Macroeconomic volatility can be higher in periods when the Taylor principle is not satisfied, not because of indeterminacy, but because monetary policy amplifies the impacts of fundamental shocks. Regime change alters the qualitative and quantitative predictions of a conventional new Keynesian model, yielding fresh interpretations of existing empirical work.
ER  -