Discussion Paper Details

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Title: Taylor Rules in Practice: How Central Banks can Intercept Sunspot Expectations

Author(s): Mark Weder

Publication Date: May 2003

Keyword(s): cash-in-advance economies, increasing returns-to-scale, indeterminacy and taylor rules

Programme Area(s): International Macroeconomics

Abstract: This Paper derives new results on the effects of employing Taylor rules in economies that are subject to real-market imperfections such as production externalities. It suggests that rules that should be avoided (chosen) in perfect-markets environments do in fact ensure (yield) unique (multiple) rational expectations solutions in alternative settings. Therefore, exact knowledge on the degree of market imperfection is pivotal for robust policy advice.

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Bibliographic Reference

Weder, M. 2003. 'Taylor Rules in Practice: How Central Banks can Intercept Sunspot Expectations'. London, Centre for Economic Policy Research.