Citation

Discussion Paper Details

Please find the details for DP2314 in an easy to copy and paste format below:

Full Details | Bibliographic Reference

Full Details

Title: The Perils of Taylor Rules

Author(s): Jess Benhabib, Stephanie Schmitt-Groh� and Mart�n Uribe

Publication Date: December 1999

Keyword(s): Interest Rate Feedback Rules, Liquidity Trap and Zero Bound On Nominal Interest Rates

Programme Area(s): International Macroeconomics

Abstract: Since John Taylor's (1993) seminal paper, a large literature has argued that active interest rate feedback rules, that is, rules that respond to increases in inflation with a more than one-for-one increase in the nominal interest rate, are stabilizing. In this paper, we argue that once the zero bound on nominal interest rates is taken into account, active interest rate feedback rules can easily lead to unexpected consequences. Specifically, we show that even if the steady state at which monetary policy is active, is locally the unique equilibrium, typically there exists an infinite number of equilibrium trajectories originating arbitrarily close to that steady state, that converge to a liquidity trap, that is, a steady state in which the nominal interest rate is near zero and inflation is possibly negative.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2314

Bibliographic Reference

Benhabib, J, Schmitt-Groh�, S and Uribe, M. 1999. 'The Perils of Taylor Rules'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2314