A note on expectational stability under non-zero trend inflation

Abstract

This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.adaptive learning, E-stability, Taylor rule, trend inflation