Working Paper: NBER ID: w24949
Authors: Lawrence Christiano; Yuta Takahashi
Abstract: We consider a model in which monetary policy is governed by a Taylor rule. The model has a unique equilibrium near the steady state, but also has other equilibria. The introduction of a particular escape clause into monetary policy works like the Taylor principle to exclude the other equilibria. We reconcile our finding about the escape clause with the sharply different conclusion reached in Cochrane (2011). Atkeson et al. (2010) study a different version of the escape clause policy, but that version is fragile in that it lacks a crucial robustness property.
Keywords: monetary policy; Taylor rule; equilibria; escape clause
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| escape clause (Y60) | inflation expectations (E31) |
| inflation expectations (E31) | economic stability (E63) |
| escape clause (Y60) | unique desired equilibrium (C62) |
| Taylor rule without escape clause (E43) | multiple equilibria (D50) |
| escape clause (Y60) | undesirable outcomes (I12) |
| escape clause (Y60) | stabilizing properties of Taylor principle (C62) |