In the presence of firm-specific capital the Taylor principle can generate multiple
equilibria. Sveen and Weinke [New perspectives on capital, sticky prices, and the
Taylor principle, J. Econ. Theory 123 (2005) 21–39] obtain that result in the
context of a Calvo-style sticky price model. One potential criticism is that the
price stickiness which is needed for our theoretical result to be relevant from a
practical point of view is somewhat to the high part of available empirical estimates.
In the present paper we show that if nominal wages are not fully flexible (which
is an uncontroversial empirical fact) then the Taylor principle fails already for
some minor degree of price stickiness. We use our model to explain the consequences
of both nominal rigidities for the desirability of alternative interest rate rules.
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