Olivier Loisel (ENSAE, CREST) – New Principles For Stabilization Policy

In a broad class of discrete-time rational-expectations models, I consider generic simple instrument rules for stabilization policy, parameterized by a coefficient ϕ ∈ R and a time horizon h ∈ Z. Using two complex-analysis theorems, I establish some simple, necessary or sufficient conditions on ϕ and h for these rules to ensure local-equilibrium determinacy. The results have direct, general implications for the validity of the Taylor principle as a determinacy condition in monetary-policy models and other models, and for the ability of backward- and forward-looking stabilization policy to ensure determinacy. They also provide guidelines for finding rules with robust determinacy properties across alternative models.