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Taylor-Rule Exit Policies for the Zero Lower Bound

Chattopadhyay, Siddhartha and Daniel, Betty C. (2015): Taylor-Rule Exit Policies for the Zero Lower Bound.

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Abstract

The monetary authority loses the ability to implement the Taylor Rule at the zero lower bound. However, the promise to implement a Taylor Rule upon exit remains an effective policy instrument. We present two Taylor-Rule exit policies, each with different commitment requirements, as alternatives to a truncated Taylor Rule. A Taylor Rule with an optimally-chosen exit date and time varying inflation target delivers fully optimal policy, but requires a negative inflation target, possibly threatening the ability to commit. A Taylor Rule with only an optimally-chosen exit date delivers almost all the gains of fully optimal policy with no need to commit to the negative inflation target.

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