Can learnability save new-Keynesian models?
McCallum (2009) argues that "learnability" can save new-Keynesian models from 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: 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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- 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.
- Bennett T. McCallum, 2008. "Inflation Determination with Taylor Rules: Is New Keynesian Analysis Critically Flawed?," NBER Working Papers 14534, National Bureau of Economic Research, Inc.
- John H. Cochrane, 2011.
"Determinacy and Identification with Taylor Rules,"
Journal of Political Economy,
University of Chicago Press, vol. 119(3), pages 565 - 615.
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