Report

Comparing forecast-based and backward-looking Taylor rules: a "global" analysis

Abstract: This paper examines the performance of forecast-based nonlinear Taylor rules in a class of simple microfunded models. The paper shows that even if the policy rule leads to a locally determinate (and stable) inflation target, there exist other learnable "global" equilibria such as cycles and sunspots. Moreover, under learning dynamics, the economy can fall into a liquidity trap. By contrast, more backward-looking and "active" Taylor rules guarantee that the unique learnable equilibrium is the inflation target. This result is robust to different specifications of the role of money, price stickiness, and the trading environment.

Keywords: learnability; inflation targeting; simple feedback rules; endogenous fluctuations;

JEL Classification: D83; E32; E52; E58;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2005-01-01

Number: 198

Note: For a published version of this report, see Stefano Eusepi, "Learnability and Monetary Policy: A Global Perspective," Journal of Monetary Economics 54, no. 4 (May 2007): 1115-31.