Taylor rules and technology shocks

In New Keynesian models, Taylor rules move real rates in the same direction as the natural rate, but less than one-for-one. Permanent, positive technology shocks raise the natural rate-policy is expansionary and hours rise relative to the flexible price case.

► A basic New Keynesian model with a Taylor rule is considered. ► The equilibrium real rate moves in the same direction as the natural rate, less than one-for-one. ► Hence monetary policy has an expansionary effect after shocks which raise the natural rate. ► Permanent productivity shocks raise the natural rate, hence policy is too accommodative. ► Hours and output rise by more than they would if prices were flexible.