Working Paper: CEPR ID: DP3899
Authors: Mark Weder
Abstract: This Paper derives new results on the effects of employing Taylor rules in economies that are subject to real-market imperfections such as production externalities. It suggests that rules that should be avoided (chosen) in perfect-markets environments do in fact ensure (yield) unique (multiple) rational expectations solutions in alternative settings. Therefore, exact knowledge on the degree of market imperfection is pivotal for robust policy advice.
Keywords: cash-in-advance economies; increasing returns to scale; indeterminacy; Taylor rules
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Implementing backward-looking Taylor rules (E43) | Stabilize sunspot-driven economies (E65) |
| Degree of market imperfections (D43) | Effectiveness of Taylor rules (E43) |
| Aggressive output targeting (L21) | Eliminate indeterminacy in economies with mild production externalities (D51) |
| Presence of market imperfections (D43) | Dynamics of monetary policy (E52) |
| Current-looking Taylor rules + Aggressive output targeting (E61) | Eliminate sunspot fluctuations (E32) |