Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60687
Authors: 
Eusepi, Stefano
Year of Publication: 
2005
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 198
Abstract: 
This paper examines the performance of forecast-based nonlinear Taylor rules in a class of simple microfunded models. The paper shows that even if the policy rule leads to a locally determinate (and stable) inflation target, there exist other learnable 'global' equilibria such as cycles and sunspots. Moreover, under learning dynamics, the economy can fall into a liquidity trap. By contrast, more backward-looking and 'active' Taylor rules guarantee that the unique learnable equilibrium is the inflation target. This result is robust to different specifications of the role of money, price stickiness, and the trading environment
JEL: 
D83
E52
E58
E32
Document Type: 
Working Paper

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