Working Paper 9902 Taylor Rules in a Limited Participation Model

  title={Working Paper 9902 Taylor Rules in a Limited Participation Model},
  author={Lawrence J. Christiano and Christopher Gust},
We use the limited participation model of money as a laboratory for studying the operating characteristics of Taylor rules for setting the rate of interest. Rules are evaluated according to their ability to protect the economy from bad outcomes such as the burst of in°ation observed in the 1970s. Based on our analysis, we argue for a rule which: (i) raises the nominal interest rate more than one-for-one with a rise in in°ation; and (ii) does not change the interest rate in response to a change… CONTINUE READING
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