Taylor Rules in a Limited Participation Model

Christiano, Lawrence J.; Gust, Christopher

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Taylor Rules in a Limited Participation Model

NBER Working Paper No. w7017

28 Pages Posted: 8 Jun 1999 Last revised: 3 Apr 2022

See all articles by Lawrence J. Christiano

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Christopher Gust

Board of Governors of the Federal Reserve System

Date Written: March 1999

Abstract

We use the limited participation model of money as a laboratory for studying the operating characteristics of Taylor rules for setting the rate of interest. Rules are evaluated according to their ability to protect the economy from bad outcomes such as the burst of inflation observed in the 1970s. Based on our analysis, we argue for a rule which: (i) raises the nominal interest rate more than one-for-one with a rise in inflation; and (ii) does not change the interest rate in response to a change in output relative to trend.

Suggested Citation: Suggested Citation

Christiano, Lawrence J. and Gust, Christopher, Taylor Rules in a Limited Participation Model (March 1999). NBER Working Paper No. w7017, Available at SSRN: https://ssrn.com/abstract=155555