IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-26-00330.html

Ruling out unstable New Keynesian equilibria: A note

Author

Listed:
  • Michael Hatcher

    (University of Southampton)

Abstract

Aside from a knife-edge case, unstable nominal equilibria in New Keynesian models imply real explosions. We show how unstable nominal equilibria can be ruled out using a Taylor-type rule with a trigger strategy designed to prevent bubbles. Hence, a 'cashless' monetary policy ensures stable, determinate inflation. These results provide support for the convention of selecting the unique stable solution in the literature. We establish these results using a baseline, linear three-equation New Keynesian model, but the main conclusions are robust to some extensions and non-linearities.

Suggested Citation

  • Michael Hatcher, 2026. "Ruling out unstable New Keynesian equilibria: A note," Economics Bulletin, AccessEcon, vol. 46(1), pages 25-33.
    • Handle: RePEc:ebl:ecbull:eb-26-00330
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2026/Volume46/EB-26-V46-I1-P3.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Reghezza, Alessio & Seghezza, Elena & Thornton, John, 2020. "Expectations in an open economy hyperinflation: Evidence from Germany 1921–23," Economics Letters, Elsevier, vol. 192(C).
    2. Tom D. Holden, 2024. "Robust Real Rate Rules," Econometrica, Econometric Society, vol. 92(5), pages 1521-1551, September.
    3. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565-615.
    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. Martin M. Andreasen & Anders F. Kronborg, 2022. "The extended perturbation method: With applications to the New Keynesian model and the zero lower bound," Quantitative Economics, Econometric Society, vol. 13(3), pages 1171-1202, July.
    6. Lawrence Christiano & Yuta Takahashi, 2018. "Discouraging Deviant Behavior in Monetary Economics," NBER Working Papers 24949, National Bureau of Economic Research, Inc.
    7. Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
    8. Loisel, Olivier, 2009. "Bubble-free policy feedback rules," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1521-1559, July.
    9. Xavier Gabaix, 2020. "A Behavioral New Keynesian Model," American Economic Review, American Economic Association, vol. 110(8), pages 2271-2327, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. John H. Cochrane, 2017. "Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound," NBER Chapters, in: NBER Macroeconomics Annual 2017, volume 32, pages 113-226, National Bureau of Economic Research, Inc.
    2. George-Marios Angeletos & Chen Lian, 2023. "Determinacy without the Taylor Principle," Journal of Political Economy, University of Chicago Press, vol. 131(8), pages 2125-2164.
    3. Patrick Minford & Naveen Srinivasan, 2015. "Can the Learnability Criterion Ensure Determinacy in New Keynesian Models?," South Asian Journal of Macroeconomics and Public Finance, , vol. 4(1), pages 43-61, June.
    4. Cochrane, John H., 2017. "The new-Keynesian liquidity trap," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 47-63.
    5. Suneetha M. S., 2014. "Perspectives on Valuation of Biodiversity," Working Papers 2014-088, Madras School of Economics,Chennai,India.
    6. Chatelain, Jean-Bernard & Ralf, Kirsten, 2014. "Stability and Identification with Optimal Macroprudential Policy Rules," EconStor Preprints 95979, ZBW - Leibniz Information Centre for Economics.
    7. Robert E. Hall & Ricardo Reis, 2016. "Achieving Price Stability by Manipulating the Central Bank’s Payment on Reserves," NBER Working Papers 22761, National Bureau of Economic Research, Inc.
    8. Gerke, Rafael & Hauzenberger, Klemens, 2017. "The Fisher paradox: A primer," Discussion Papers 20/2017, Deutsche Bundesbank.
    9. Jeffrey Campbell & Jacob Weber, 2021. "Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 243-254, July.
    10. Boehl, Gregor & Lieberknecht, Philipp, 2025. "The hockey stick Phillips curve and the effective lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 170(C).
    11. Barbosa, Fernando de Holanda, 2018. "Is the new keynesian is curve forward looking?," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 797, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    12. Platonov, Konstantin & Goren, Amir, 2024. "Inflation targeting and output stabilization in an estimated monetary model," Journal of Economics and Business, Elsevier, vol. 132(C).
    13. Mauersberger, Felix, 2021. "Monetary policy rules in a non-rational world: A macroeconomic experiment," Journal of Economic Theory, Elsevier, vol. 197(C).
    14. Loisel, Olivier, 2021. "The implementation of stabilization policy," Theoretical Economics, Econometric Society, vol. 16(2), May.
    15. Morris, Stephen D., 2020. "Is the Taylor principle still valid when rates are low?," Journal of Macroeconomics, Elsevier, vol. 64(C).
    16. Diba, Behzad & Loisel, Olivier, 2021. "Pegging the interest rate on bank reserves: A resolution of New Keynesian puzzles and paradoxes," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 230-244.
    17. Rodríguez Arosemena, Nicolás, 2018. "The Dominium Mundi Game and the Case for Artificial Intelligence in Economics and the Law," MPRA Paper 90560, University Library of Munich, Germany.
    18. Donato Masciandaro, 2026. "Monetary Policy and Taylor Reaction Functions: Business Cycles, Central Bank Governance and Central Bankers’ Preferences," BAFFI CAREFIN Working Papers 26270, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    19. Tom D. Holden, 2024. "Robust Real Rate Rules," Econometrica, Econometric Society, vol. 92(5), pages 1521-1551, September.
    20. Bennett T. McCallum, 2009. "The Role of "Determinacy" in Monetary Policy Analysis," IMES Discussion Paper Series 09-E-17, Institute for Monetary and Economic Studies, Bank of Japan.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-26-00330. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.