The wicksell instability problem. Is a Taylor rule always necessary to stabilize macroeconomic variables?

Abstract

This work is based on a model of overlapping generations. The response of private consumption to nominal and real interest rates and inflation depends on the elasticity of substitution in intertemporal consumption. If this is less than one, short and long-term consumption depends positively on the real interest rate and negatively on the nominal rate and inflation. In general, in this case, a Taylor rule is not necessary to stabilize the macroeconomic variables and setting the nominal policy interest rate, or establishing a rule that keeps the real interest rate constant, is sufficient to generate stability. Setting the nominal interest rate when the elasticity of substitution described is greater than unity can also stabilize the system.