TY  - JOUR
AU  - Cochrane,John H.
TI  - Inflation Determination With Taylor Rules: A Critical Review
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13409
PY  - 2007
Y2  - September 2007
UR  - http://www.nber.org/papers/w13409
L1  - http://www.nber.org/papers/w13409.pdf
N1  - Author contact info:
John H. Cochrane
Graduate School of Business
University of Chicago
5807 S. Woodlawn
Chicago, IL  60637
Tel: 773/702-3059
Fax: 773/702-0458
E-Mail: john.cochrane@gsb.uchicago.edu
AB  - The new-Keynesian, Taylor-rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly stabilize future inflation. Rather, the Fed threatens hyperinflation, unless inflation jumps to one particular value on each date. However, there is nothing in economics to rule out hyperinflationary or deflationary solutions. Therefore, inflation is just as indeterminate under "active" interest rate targets as it is under standard fixed interest rate targets. Inflation determination requires ingredients beyond an interest-rate policy that follows the Taylor principle.
ER  -