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A NOTE ON EXPECTATIONAL STABILITY UNDER NONZERO TREND INFLATION

Published online by Cambridge University Press:  05 January 2012

Teruyoshi Kobayashi  and
Ichiro Muto
Teruyoshi Kobayashi*
Affiliation:
Kobe University
Ichiro Muto
Affiliation:
Bank of Japan
*
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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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.

Keywords

Adaptive LearningE-stabilityTaylor RuleTrend Inflation
Type
Note
Information
Macroeconomic Dynamics , Volume 17 , Issue 3 , April 2013 , pp. 681 - 693
Copyright
Copyright © Cambridge University Press 2011

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