NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Taylor Rules in a Limited Participation Model

Lawrence J. Christiano, Christopher J. Gust

NBER Working Paper No. 7017
Issued in March 1999
NBER Program(s):   ME   EFG

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 inflation 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 inflation; and (ii) does not change the interest rate in response to a change in output relative to trend.

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Document Object Identifier (DOI): 10.3386/w7017

Published: Published as "Sticky Price and Limited Participation Models of Money: A Comparison", European Economic Review, Vol. 41, no. 6 (June 1997): 1201-12 49.

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