December 2018 issue contents
Taylor-Rule Exit Policies for the Zero Lower Bound

by Siddartha Chattopadhyaya and Betty C. Danielb


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 show that a Taylor rule, with an optimally chosen exit date and time-varying inflation target, delivers fully optimal policy at the zero lower bound. Additionally, a Taylor rule with only an optimally chosen exit date but a zero inflation target delivers almost all the welfare gains of optimal policy and is simpler to communicate.

JEL Code: E5, E52.

Full article (PDF, 53 pages, 902 kb)


a Indian Institute of Technology Kharagpur
b University at Albany - SUNY