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Price indexation, habit formation, and the Generalized Taylor Principle

Vol: 
CAMA Working Paper 52/2013
Author name: 
Saroj Bhattarai
Jae Won Lee
Woong Yong Park
Year: 
2013
Month: 
August
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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