Working Paper

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.

JEL Classification: E31; E52; E58;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2013

Number: 152

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.