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Ruling out unstable New Keynesian equilibria: A note

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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
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    References listed on IDEAS

    as
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    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

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