Publication

This paper examines how low trend inflation affects the dynamics of a standard neo-Keynesian model where monetary policy is described by a standard Taylor rule. The authors argue that the effect is large and that, moreover, trend inflation enlarges the indeterminacy region in the parameter space, substantially altering the so-called Taylor principle. They conclude that, whatever the set up, the literature on Taylor rules cannot disregard average inflation in both theoretical and empirical analysis.