Interest rate rules, price determinacy and the value of money in a non-Ricardian world

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  • 1 January 2005
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      • Published in RePEc
Abstract
This article studies under which conditions interest rate rules "à la Taylor" [1993. Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195-214] lead to price determinacy. We scrutinize notably two famous results, which are standard in the traditional "Ricardian" model with a single dynasty of consumers: (1) a pure interest rate peg leads to nominal price indeterminacy; (2) a strong reaction (usually more than one for one) of nominal interest rates to inflation is conducive to price determinacy (the Taylor principle). This article extends the analysis to rigorous dynamic non-Ricardian models. The results turn out to be quite different, since notably prices may be determinate if the interest rate responds less than one for one to inflation, and even under a pure interest rate peg.
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