Price indexation, habit formation, and the Generalized Taylor Principle
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Bhattarai, Saro J.
Lee, Jae Won
Park, Woong Yong
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Crawford School of Public Policy, The Australian National University
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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 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 positive steady-state inflation, interest rate smoothing in monetary policy,
partial dynamic price indexation, and habit formation in consumption.
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Centre for Applied Macroeconomic Analysis Working Papers
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Publication
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