Since late 2008, both inflation and nominal interest rates have been extremely low in the United States. These facts have focused attention on ideas motivated by the theory discussed in several articles by economists Jess Benhabib, Stephanie Schmitt-Grohé, and Martín Uribe—in particular, that an active Taylor rule, together with a moderate inflation target, could have the unintended consequence of leading the economy to undesirably low inflation with a near-zero nominal interest rate. In the new issue of Economic Quarterly, Alexander L. Wolman and Tim Hursey of the Richmond Fed provide an accessible introduction to multiple equilibria under active Taylor rules by highlighting the ideas in the research by Benhabib, Schmitt-Grohé, and Uribe. The specific model used in this article—Rotemberg price setting in discrete time—fits neatly into the frameworks typically used for applied monetary policy analysis.
You can find the full text of this article and others in the latest issue of Economic Quarterly at: http://www.richmondfed.org/publications/research/economic_quarterly/.
Also in the Fourth Quarter 2010 issue:
The Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. For free copies or more information, contact the Federal Reserve Bank of Richmond's Research Department—Publications at 800.322.0565. or visit www.richmondfed.org/research/.
The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.