New Principles for Stabilization Policy
Title: New Principles for Stabilization Policy
Abstract: In a broad class of discrete-time rational-expectations models, I consider stabilization-policy rules making the policy instrument react with coefficient ϕ ∈ R to a (past, current, or expected future) generic variable at time horizon h ∈ Z, possibly among other variables. Using two complex-analysis theorems, I establish analytically some simple, easily interpretable, necessary or sufficient conditions on ϕ and h for these rules to ensure local-equilibrium determinacy. These conditions lead to new, general principles for stabilization policy in terms of whether, and how strongly or weakly, to react to any variable, at any horizon, in any model. Building on these conditions, I characterize circumstances under which the long-run Taylor principle is (not) necessary, (not) sufficient, or irrelevant for determinacy. I also provide the first hard guidelines for finding rules with robust determinacy properties across alternative models.