When the Central Bank sets nominal rates as a a non-decreasing function of the inflation rate to stabilize the economy, that is it uses a Taylor Rule, the zero lower bound on interest rates may result in multiple equilibria and a liquidity trap. However, if fiscal policy is non-Ricardian, or...

We explore the long-run implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbacked government debt. Because monetary policy is accommodative only when it is passive, the Taylor principle, which requires...

The role of asset prices in monetary policy has been widely debated. This paper examines the role that stock prices play in the monetary policy of the ECB. For this purpose, standard and augmented forward-looking Taylor rules are estimated for the ECB using monthly data between 1999 and 2005. Of...

We test for the presence of interest rate smoothing in forward looking Taylor rules in first differences. We also consider financial and asymmetric preferences indicators. We find that interest rate smoothing is not induced by an omitted variable bias.

The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of...

We document a novel empirical phenomenon: the U.S. Federal Reserve appears to set interest rates partly in response to regional economic disparities. This result is remarkably robust even after controlling for a wide variety of factors, including the central bank’s information set and a...

We develop a dynamic stochastic general equilibrium model of a small open economy in which both price rigidity and financial friction exist. We compare two cases featuring different interest rate rules. Both cases use the standard Taylor-type interest rate rules, but the second case also...

We investigate the source of the high persistence in the Federal Funds Rate relative to the predictions of simple Taylor rules. While much of the literature assumes that this reflects interest-smoothing on the part of monetary policy-makers, an alternative explanation is that it represents...

This paper investigates optimized monetary policy rules in the presence of government intervention to stabilize prices of certain categories of goods and services. The paper estimates a small-scale, structural equilibrium model with a sticky-price sector and a subsidized-price sector for a large...