Stabilising Taylor rules when the supply shock has a unit root
نویسنده
چکیده
This paper studies the implication of unit root supply shocks for the Taylor rule. I find that, when supply shocks have a unit root, if a central bank wishes to guarantee the stationarity of inflation, then their interest rate reaction function should not respond to the output gap. Once the stationarity of inflation is guaranteed by the output-gap-response parameter, the ‘‘Taylor principle’’ can be applied for warranting determinacy of the dynamics. 2014 Elsevier Inc. All rights reserved.
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