The Taylor principle fights back, Part I

New Keynesian models with limited asset market participation assert that under plausible conditions higher real interest rates increase aggregate demand, the Taylor principle leads to indeterminacy, and passive policy ensures a unique equilibrium. These striking results stem from the assumption that the real wage is highly flexible. Relaxing this assumption slightly brings back the normal world where higher real interest rates reduce aggregate demand and where the Taylor principle is effectively necessary and sufficient for a unique, stable equilibrium.