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A NOTE ON EXPECTATIONAL STABILITY UNDER NONZERO TREND INFLATION

  • Teruyoshi Kobayashi (a1) and Ichiro Muto (a2)
Abstract

This study examines the expectational stability of rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is nonzero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous, forecast, or lagged data) introduced in the Taylor rule. Our results suggest that high macroeconomic volatility during the period of high trend inflation can be explained well by introducing the concept of expectational stability.

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Corresponding author
Address correspondence to: Teruyoshi Kobayashi, Graduate School of Economics, Kobe University, 2-1 Rokkodai-cho, Nada-ku, Kobe, Japan; e-mail: kobayashi@econ.kobe-u.ac.jp.
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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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