The perils of Taylor rules (Q5931243): Difference between revisions

The authors study effects on an economy of active interest rate feedback rules, i.e. the rules that respond to increases in inflation with a more than one-to-one increase in the nominal interest rate. They showed that the intended steady state at which monetary policy is active may be unstable and typically there exists saddle connections leading the system to a liquidity trap, i.e. a steady state in which the nominal interest rate is near zero. Two kinds of time-continuous models are used in the paper: a simple flexible-price economy and a model with price stickiness.