American Economic Review: Vol. 100 No. 1 (March 2010)


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Generalizing the Taylor Principle: Reply

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Davig, Troy, and Eric M. Leeper. 2010. "Generalizing the Taylor Principle: Reply." American Economic Review, 100(1): 618-24.

DOI: 10.1257/aer.100.1.618


Farmer, Waggoner, and Zha (2009) (FWZ) show that a new Keynesian model with regime-switching monetary policy can support multiple solutions, appearing to contradict findings in Davig and Leeper (2007) (DL). The explanation is straightforward: FWZ derive solutions using a model that differs from the one to which the DL conditions apply. The FWZ solutions also require that the exogenous driving process is a function of private and policy parameters. This undermines the sharp distinctions among "deep parameters" typical of optimizing models and makes it difficult to ascribe economic interpretations to FWZ's additional solutions. (E12, E31, E43, E52)

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Davig, Troy (Federal Reserve Bank of Kansas City)
Leeper, Eric M. (IN U)

JEL Classifications

E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E31: Price Level; Inflation; Deflation
E43: Interest Rates: Determination, Term Structure, and Effects
E52: Monetary Policy

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