Hi all,
I am working with a perfect foresight solver. Somehow, when I play with the Taylor rule, I can set the reaction to inflation in the Taylor rule below 1 and still get the results. Normally, in a stochastic setup, I surely run into a violation of Blanchard Kahn.
I am confused and wonder if there is some paper about this problem or if can we actually do that with a perfect foresight setup. In my opinion, a violation of Taylor’s principle is hard to understand. Any suggestion is highly appreciated.
NK.mod (2.5 KB)
Many thanks.
Violations of the Taylor principle usually imply indeterminacy. That means there are multiple solution paths. Your perfect foresight simulation has found one of them.
Thanks a lot, Prof Pfeifer.
Maybe a practical question from my side. If I don’t want to work on indeterminacy, I saw some papers on this. But I just want to see the results. (i.e welfare or IRFs of output) change with the inflation reaction coefficient in the Taylor rule. Should I just set the lower bound of 1 for that coefficient? Unfortunately, I do not know much about the problem of indeterminacy because we usually do not consider that during grad school.
Thanks a lot.
You need to set a plausible Taylor rule. Having inflation feedback of 1 is typically not a reasonable value.