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.