Price indexation, habit formation, and the Generalized Taylor Principle
Abstract: We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with positive steady-state inflation, interest rate smoothing in monetary policy, partial dynamic price indexation, and habit formation in consumption.
File(s): File format is application/pdf http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0152.pdf
Provider: Federal Reserve Bank of Dallas
Part of Series: Globalization Institute Working Papers
Publication Date: 2013
Pages: 22 pages
Note: Published as: Bhattarai, Saroj, Jae Won Lee and Woong Yong Park (2014), "Price Indexation, Habit Formation, and the Generalized Taylor Principle," Journal of Economic Dynamics and Control 48: 218-225.