Countercyclical versus Procyclical Taylor Principles

Mardi | 2016-03-01
16h-17h20 Sully05

Jean-Bernard CHATELAIN – Kirsten RALF

Assuming inflation is a forward variable in Taylor (1999) model, this paper finds opposite policy rule recommendations with countercyclical policy rule parameters (Taylor principle: inflation rule larger than one and bounded upwards) in the case of optimal policy under commitment versus pro-cyclical policy rule parameters (inflation rule parameter below zero) in the case of discretionary policy. For the observed high inertia of the Fed with tiny variations of the nominal policy rate within the range [0%,4%] during the great moderation, the cost of time-inconsistency is negligible for optimal policy without commitment. In this case, time-inconsistency cannot be the ultimate argument to reject countercyclical Taylor principle.