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Determinacy, Learnability, Plausibility, and the Role of Money in New Keynesian Models

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  • Bennett T. McCallum

Abstract

Recent mainstream monetary policy analysis focuses on rational expectation solutions that are uniquely stable. A number of recent studies have examined the question of whether typical New Keynesian (NK) models, with policy rules that satisfy the Taylor principle, also exhibit solutions with explosive inflation that cannot be ruled out by any transversality condition or any other generally accepted economic principle. This paper contributes to that debate by supporting and developing previous arguments suggesting that such explosive solutions are informationally infeasible. It also critiques prevailing notions of "determinancy" and outlines two alternative approaches to solution selection.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18215.

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Date of creation: Jul 2012
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Handle: RePEc:nbr:nberwo:18215

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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. Kaushik Mitra & Seppo Honkapohja, 2004. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," Royal Holloway, University of London: Discussion Papers in Economics, Department of Economics, Royal Holloway University of London 04/13, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  3. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  4. Minford, Patrick & Srinivasan, Naveen, 2011. "Ruling out unstable equilibria in New Keynesian models," Economics Letters, Elsevier, vol. 112(3), pages 247-249, September.
  5. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 147-180, February.
  6. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13410, National Bureau of Economic Research, Inc.
  7. Cho, Seonghoon & Moreno, Antonio, 2011. "The forward method as a solution refinement in rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 257-272, March.
  8. Bennett T. McCallum, 2009. "Causality, Structure, and the Uniqueness of Rational Expectations Equilibria," NBER Working Papers 15234, National Bureau of Economic Research, Inc.
  9. Flood, Robert P & Garber, Peter M, 1980. "An Economic Theory of Monetary Reform," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 24-58, February.
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Cited by:
  1. Seonghoon Cho & Bennett T. McCallum, 2012. "Refining Linear Rational Expectations Models and Equilibria," NBER Working Papers 18348, National Bureau of Economic Research, Inc.
  2. Bennett T. McCallum, 2012. "A Continuity Refinement for Rational Expectations Solutions," NBER Working Papers 18323, National Bureau of Economic Research, Inc.

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