Inattentiveness and the Taylor Principle

Abstract

We present determinacy bounds on monetary policy in three models of inattentiveness - sticky information, imperfect common knowledge, and arbitrary finite inattentiveness. We find that these bounds are identical across these models as they all share a common vertical long run Phillips curve. The resulting bounds are more conservative than in the standard Calvo sticky price New Keynesian model. Specifically, the Taylor principle is now necessary directly - no amount of output targeting can substitute for the monetary authority’s concern for inflation. These determinacy bounds are obtained by appealing to frequency domain and forecasting/prediction innovation techniques that themselves provide novel interpretations of the Phillips curves.
An earlier version was entitled ``Sticky Information and the Taylor Principle’'.

Alexander Meyer-Gohde

Professor of Financial Markets and Macroeconomics

My research interests include macroeconomics, macro-finance, econometrics, and numerical methods