Price indexation,habit formation,and the Generalized Taylor Principle |
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| Institution: | 1. BETA, Strasbourg University, France;2. European Court of Auditors, Luxembourg, Luxembourg;3. LaRGE, Strasbourg University, France;1. Dept. of Business Administration, Saint Peter''s University;2. Dept. of Economics and Finance, Tobin College of Business, Saint John''s University;1. College of Business, Texas A&M University - Corpus Christi, TX, USA;2. Schar School of Policy and Government, George Mason University, Arlington, VA, USA |
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| Abstract: | We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to a change in inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with interest rate smoothing in monetary policy, partial dynamic price indexation, and habit formation in consumption. |
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| Keywords: | Determinacy Generalized Taylor Principle Sticky prices Price indexation Habit formation |
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