Wicksell versus Taylor: a quest for determinacy and the (ir)relevance of the Taylor principle

Available from: 
October 2013
Paper author(s): 
Rodrigo Caputo, Central Bank of Chile
Sofia Bauducco, Central Bank of Chile
Topic: 
Macroeconomics - Economic growth - Monetary Policy
Year: 
2013


In a new-Keynesian model we compare the determinacy regions of price-level targeting rules (called Wicksellian rules) and Taylor rules. We conclude that Wicksellian rules do not require the Taylor principle to be satisfied to induce determinacy. Moreover, the areas of determinacy are generally larger under Wicksellian rules. Our results have two implications. First, estimating Taylor rules when the true rule is Wicksellian may lead to conclude that the equilibrium is indeterminate when this is not the case. Second, by following a Wicksellian rule, the frequency of occurrence of an active zero lower bound on the policy rate is greatly reduced. 

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Research section: 
Lacea 2013 annual meeting
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