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The Incredible Taylor Principle

Working Paper 790 | Published January 28, 2022

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Authors

Pablo Neumeyer Universidad Torcuato Di Tella
Juan Pablo Nicolini Senior Research Economist and Universidad Torcuato Di Tella
The Incredible Taylor Principle

Abstract

This note addresses the role of the Taylor principle to solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate rule. We first study the role of imposing two additional ad-hoc restrictions on the definition of equilibrium. Imposing the equilibrium to be locally unique never delivers a unique outcome. Imposing the equilibrium to be bounded, renders the outcome unique only if the inflation target is the Friedman rule. Second, we show that the Taylor principle is strongly time inconsistent - in a sense we make very precise - and that policies that implement the Friedman rule are the only sustainable policies.




An updated version of this paper was published as [Staff Report 658](https://doi.org/10.21034/sr.658).