DP3899 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, taylor rules
JEL(s): E32, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3899

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.