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Can Learnability Save New-Keynesian Models?

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  • John H. Cochrane

Abstract

Bennett McCallum (2009), applying Evans and Honkapohja's (2001) results, argues that "learnability" can save New-Keynesian models from their indeterminacies. He claims the unique bounded equilibrium is learnable, and the explosive equilibria are not. However, he assumes that agents can directly observe the monetary policy shock. Reversing this assumption, I find the opposite result: the bounded equilibrium is not learnable and the unbounded equilibria are learnable. More generally, I argue that a threat by the Fed to move to an "unlearnable" equilibrium for all but one value of inflation is a poor foundation for choosing the bounded equilibrium of a New-Keynesian model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15459.

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Date of creation: Oct 2009
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Publication status: published as Cochrane, John H., 2009. "Can learnability save new-Keynesian models?," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1109-1113, November.
Handle: RePEc:nbr:nberwo:15459

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  1. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(3), pages 565 - 615.
  2. McCallum, Bennett T., 2009. "Inflation determination with Taylor rules: Is new-Keynesian analysis critically flawed?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(8), pages 1101-1108, November.
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Cited by:
  1. Seitz, Franz & Schmidt, Markus A., 2014. "Money in modern macro models: A review of the arguments," OTH im Dialog: Weidener Diskussionspapiere 37, University of Applied Sciences Amberg-Weiden (OTH).
  2. Bennett T. McCallum, 2012. "A Continuity Refinement for Rational Expectations Solutions," NBER Working Papers 18323, National Bureau of Economic Research, Inc.
  3. Tom Holden, 2012. "Learning from learners," School of Economics Discussion Papers, School of Economics, University of Surrey 1512, School of Economics, University of Surrey.
  4. Airaudo, Marco & Nisticò, Salvatore & Zanna, Luis-Felipe, 2012. "Learning, Monetary Policy and Asset Prices," School of Economics Working Paper Series, LeBow College of Business, Drexel University 2012-12, LeBow College of Business, Drexel University.
  5. Emanuel Gasteiger, 2013. "Heterogeneous Expectations, Optimal Monetary Policy, and the Merit of Policy Inertia," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201308, Centre for Dynamic Macroeconomic Analysis.
  6. Minford, Patrick & Srinivasan, Naveen, 2011. "Ruling out unstable equilibria in New Keynesian models," Economics Letters, Elsevier, Elsevier, vol. 112(3), pages 247-249, September.
  7. Airaudo, Marco, 2013. "Monetary policy and stock price dynamics with limited asset market participation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 36(C), pages 1-22.
  8. Balfoussia, Hiona & Brissimis, Sophocles & Delis, Manthos D, 2011. "The theoretical framework of monetary policy revisited," MPRA Paper 32236, University Library of Munich, Germany.

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