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Can the learnability criterion ensure determinacy in New Keynesian Models?

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  • Minford, Patrick

    ()
    (Cardiff Business School)

  • Srinivasan, Naveen

Abstract

Forward-looking RE models such as the popular New Keynesian (NK) model do not provide a unique prediction about how the model economy behaves. We need some mechanism that ensures determinacy. McCallum (2011) says it is not needed because models are learnable only with the determinate solution and so the NK model, once learnt in this way, will be determinate. We agree: the only learnable solution that has agents converge on the true NK model is the bubble-free one. But once they have converged they must then understand the model and its full solution therefore including the bubble. Hence the learnability criterion still fails to pick a unique RE solution in NK models.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2012/16.

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Length: 16 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:cdf:wpaper:2012/16

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Keywords: New-Keynesian; Taylor Rule; Determinacy; E-stability; Learnability;

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  1. Minford, Patrick & Srinivasan, Naveen, 2009. "Determinacy in New Keynesian models: a role for money after all?," Cardiff Economics Working Papers E2009/21, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2011.
  2. Benjamin Friedman, 2003. "The LM Curve: A Not-So-Fond Farewell," NBER Working Papers 10123, National Bureau of Economic Research, Inc.
  3. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
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