Labor marketsearch,theTaylorprinciple,andindeterminacy

In asticky-pricemodelwithlabormarketsearchandmatchingfrictions,forecast-based interest ratepolicyalmostalwaysinducesindeterminacywhenitisstrictlyinflation targetingandsatisfiestheTaylorprinciple.Indeterminacyisduetoavacancychannelof monetarypolicythatmakesinflationexpectationsself-fulfilling.Theeffectofthis channelstrengthensasthesluggishnessoftheadjustmentofemploymentrelativeto that ofconsumptionincreases.Whenthisrelativesluggishnessishigh,theTaylor principlefailstoensuredeterminacy,regardlessofwhetherthepolicyisforecast-based or outcome-based,whetheritisstrictlyorflexiblyinflationtargeting,orcontainspolicy rate smoothing.