A Note on Expectational Stability under Non-Zero Trend Inflation

12 Pages Posted: 8 Sep 2009 Last revised: 5 Sep 2010

See all articles by Teruyoshi Kobayashi

Teruyoshi Kobayashi

Department of Economics, Kobe University

Ichiro Muto

Bank of Japan

Date Written: September 3, 2009

Abstract

This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.

Keywords: adaptive learning, E-stability, Taylor rule, trend inflation

JEL Classification: D84, E31, E52

Suggested Citation

Kobayashi, Teruyoshi and Muto, Ichiro, A Note on Expectational Stability under Non-Zero Trend Inflation (September 3, 2009). Available at SSRN: https://ssrn.com/abstract=1469363 or http://dx.doi.org/10.2139/ssrn.1469363

Teruyoshi Kobayashi

Department of Economics, Kobe University ( email )

2-1, Rokkodai
Nada-Ku
Kobe, Hyogo, 657-8501
Japan