Arbeitspapier
Deriving the Taylor principle when the central bank supplies money
The paper presents a human-capital-based endogenous growth, cash-in-advance economy with endogenous velocity where exchange credit is produced in a decentralized banking sector, and money is supplied stochastically by the central bank. From this it derives an exact functional form for a general equilibrium Taylor rule. The inflation coefficient is always greater than one when the velocity of money exceeds one; velocity growth enters the equilibrium condition as a separate variable. The paper then successfully estimates the magnitude of the coefficient on inflation from 1000 samples of Monte Carlo simulated data. This shows that it would be spurious to conclude that the central bank has a reaction function with a strong response to inflation in a 'Taylor principle' sense, since it is only meeting fiscal needs through the inflation tax. The paper also estimates several deliberately misspecified models to show how an inflation coefficient of less than one can result from model misspecification. An inflation coefficient greater than one holds theoretically along the balanced growth path equilibrium, making it a sharply robust principle based on the economy's underlying structural parameters.
- Language
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Englisch
- Bibliographic citation
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Series: Cardiff Economics Working Papers ; No. E2012/20
- Classification
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Wirtschaft
General Aggregative Models: Neoclassical
Price Level; Inflation; Deflation
Interest Rates: Determination, Term Structure, and Effects
Monetary Policy
- Subject
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Taylor rule
velocity
forward-looking
misspecification bias
- Event
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Geistige Schöpfung
- (who)
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Davies, Ceri
Gillman, Max
Kejak, Michal
- Event
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Veröffentlichung
- (who)
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Cardiff University, Cardiff Business School
- (where)
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Cardiff
- (when)
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2012
- Handle
- Last update
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20.09.2024, 8:23 AM CEST
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Davies, Ceri
- Gillman, Max
- Kejak, Michal
- Cardiff University, Cardiff Business School
Time of origin
- 2012
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Deriving the Taylor Principle when the Central Bank Supplies Money
When the Taylor principle isinsufficient
Generalizing the Taylor principle: Comment
Trend Inflation, Taylor Principle and Indeterminacy
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Endogenous Growth and the Taylor Principle
Trend inflation, Taylor principle and indeterminacy
Endogenous growth and the Taylor principle
Sticky information and the Taylor principle
Trend Inflation, Taylor Principle and Indeterminacy
Trend Inflation, Taylor Principle and Indeterminacy