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Inflation determination with Taylor rules: Is new-Keynesian analysis critically flawed?

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  • McCallum, Bennett T.

Abstract

Cochrane (2007) has strongly questioned the basic economic logic of current monetary policy analysis, arguing that New Keynesian (NK) models imply rational expectations paths with explosive inflation that do not imply explosions in real variables relevant for transversality conditions. Consequently, the usual logic does not rule out solutions with explosive inflation. That result does not, however, justify negative conclusions about NK analysis, for a different criterion is logically satisfactory. It is that, to be plausible, a RE solution must satisfy the property of least-squares learnability. Adoption of this criterion serves to justify in principle the bulk of current mainstream analysis.

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  • McCallum, Bennett T., 2009. "Inflation determination with Taylor rules: Is new-Keynesian analysis critically flawed?," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1101-1108, November.
    • Handle: RePEc:eee:moneco:v:56:y:2009:i:8:p:1101-1108
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    More about this item

    Keywords

    Determinacy Transversality Learnability New Keynesian Explosive;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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