Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73887
Authors: 
Luhan, Wolfgang
Scharler, Johann
Year of Publication: 
2013
Series/Report no.: 
Working Papers in Economics and Statistics 2013-03
Abstract: 
We develop a simple experimental setting to evaluate the role of the Taylor principle, which holds that the nominal interest rate has to respond more than one-for-one to fluctuations in the inflation rate. In our setting, the average inflation rate fluctuates around the inflation target if the computerized central bank obeys the Taylor principle. If the Taylor principle is violated, then the average inflation rate persistently deviates from the target. We find that these deviations from the target are less pronounced, if inflation rates cannot be as readily observed as nominal interest rates. This result is consistent with the interpretation that subjects underestimate the influence of inflation on the real return to savings if the inflation rate is only observed ex post.
Subjects: 
Taylor principle
Interest Rate Rule
Inflation Illusion
Laboratory Experiment
JEL: 
E30
E52
C90
Document Type: 
Working Paper

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