Keywords: Taylor rule, Taylor principle, equilibrium determinacy
Abstract: We add a nominal tax system to a sticky-price monetary business cycle model.
When nominal interest income is taxed, the coefficient on inflation in a
Taylor-type monetary policy rule must be significantly larger than one in
order for the model economy to have a determinate rational expectations
equilibrium. When depreciation is treated as a charge against taxable income,
an even larger weight on inflation is required in the Taylor rule in order
to obtain a determinate and stable equilibrium. These results have obvious
implications for assessing the historical conduct of monetary policy.
Full paper (373 KB PDF)
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Last update: November 8, 2002