Abstract
This paper seeks to adjust Taylor rule to mimic an environment that has central bank inability (losses). Moreover, the current paper is aiming at investigating the effect of the new features of Taylor rule within a context of a New-Keynesian model on a developing economy. The current paper concludes that we can utilize Taylor rule within a New-Keynesian model to introduce the influence of the central bank inability on the economy. Central bank inability decreases both expected future real interest rate and expected future real output. On the contrary, it increases expected future nominal interest rate and expected future inflation rate. Moreover, we prove that the effect of central bank inability has larger effect on the expected inflation rate more than the influence of targeted inflation rate.
Original language | English |
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Pages (from-to) | 395-409 |
Number of pages | 15 |
Journal | International Review of Economics |
Volume | 57 |
Issue number | 4 |
DOIs | |
Publication status | Published - Dec 2010 |
Externally published | Yes |
Keywords
- Central bank ability
- Central bank losses
- Developing countries
- Inflation rate
- New-Keynesian model
- Taylor rule
ASJC Scopus subject areas
- General Economics,Econometrics and Finance