Generalizing the Taylor Principle: Comment
Roger E.A. Farmer, Daniel F. Waggoner, and Tao Zha
Working Paper 2008-19
Davig and Leeper (2007) have proposed a condition they call the generalized Taylor principle to rule out indeterminate equilibria in a version of the New Keynesian model, where the parameters of the policy rule follow a Markov-switching process. We show that although their condition rules out a subset of indeterminate equilibria, it does not establish uniqueness of the fundamental equilibrium. We discuss the differences between indeterminate fundamental equilibria included by Davig and Leeper's condition and fundamental equilibria that their condition misses.
JEL classification: E52
Key words: bounded solutions, multiple fundamental equilibria, historical dependence
The authors thank the referees of the American Economic Review and Mark Gertler for helpful comments. Farmer acknowledges the support of National Science Foundation grant no. SBR 0418174. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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