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The calm policymaker

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  • John Barrdear

    (Bank of England)

Abstract

Determinacy is ensured in the New Keynesian model when firms face imperfect common knowledge, regardless of whether the Taylor principle is satisfied. Strategic complementarity in pricing and idiosyncratic noise in firms’ signals, however small, are together sufficient to eliminate backward-looking solutions without appealing to the assumptions of Blanchard and Kahn (1980). Standard solutions emerge when the Taylor principle is followed, but when the policymaker demurs, the price level — and not just inflation — is stationary. A unique and stable solution also emerges with the interest rate pegged to its steady-state value, in contrast to Sargent and Wallace (1975).

Suggested Citation

  • John Barrdear, 2017. "The calm policymaker," Bank of England working papers 653, Bank of England.
    • Handle: RePEc:boe:boeewp:0653
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    References listed on IDEAS

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    4. McCallum, Bennett T., 2007. "E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1376-1391, April.
    5. Rendahl, Pontus, 2017. "Linear Time Iteration," Economics Series 330, Institute for Advanced Studies.
    6. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, vol. 3(2), pages 90-105, April.
    7. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-770, August.
    8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Dispersed information; imperfect common knowledge; New Keynesian; indeterminacy; Blanchard-Kahn; Tay;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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