Monetary Policy without the Taylor Principle

We show that a vanishingly small friction in intertemporal co-ordination results in a unique bounded equilibrium in the New Keynesian model. This is the equilibrium customarily used to guide monetary policy, also known as the minimum-state-variable solution. But it does not rely on the Taylor Principle or any other off-equilibrium policy threat, and is therefore also immune to the Fiscal Theory of the Price Level. This liberates policy analysis from a thorny equilibrium selection issue.

Please sign up for meetings here: