Tim Hursey and Alexander L. Wolman
In linear macroeconomic models, an active Taylor rule for monetary policy can guarantee a locally unique nonexplosive equilibrium. In a series of articles, Benhabib, Schmitt-Grohé, and Uribe looked beyond the local dynamics and showed that active Taylor rules could interact with the zero bound on nominal interest rates to generate multiple equilibria, including a steady-state equilibrium with inflation below target. Recently, the persistence of low inflation and low nominal interest rates has brought attention to Benhabib, Schmitt-Grohé, and Uribe's work in policy circles. We provide an introduction to this line of research. The specific model used here — Rotemberg price setting in discrete time — fits neatly into the frameworks typically used for applied monetary policy analysis. Furthermore, we provide computer programs in the open source software R to replicate the results in the paper.
Our Research Focus: Inflation and Monetary Policy
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