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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Price indexation, habit formation, and the Generalized Taylor Principle
Saroj Bhattarai
Jae Won Lee
Woong Yong Park
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.


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Saroj Bhattarai & Jae Won Lee & Woong Yong Park, Price indexation, habit formation, and the Generalized Taylor Principle, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 152, 2013.
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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.
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