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Multiple-Solution Indeterminacies in Monetary Policy Analysis

  • Bennett McCallum

This paper discusses four current topics in monetary policy analysis, each of which hinges on the possibility of multiple solutions in rational expectations (RE) models. In three of these cases-involving inflation forecast targeting, the zero-lower bound deflation trap, and the fiscal theory of the price level-analysis based on E-stability and adaptive learnability of the solutions suggests that only one of them is a viable equilibrium candidate. Thus the dangers alleged to prevail, in these cases, are not ones with which actual policymakers need to be concerned. In the case of the Taylor principle, by contrast, policy behavior that violates the principle is genuinely undesirable, since all of the RE equilibria fail to be learnable.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2003-E77.

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Handle: RePEc:cmu:gsiawp:1359313521
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  7. Honkapohja, Seppo & Mitra, Kaushik, 2001. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," CEPR Discussion Papers 2846, C.E.P.R. Discussion Papers.
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  18. Evans, George W & Honkapohja, Seppo, 1992. "On the Robustness of Bubbles in Linear RE Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 1-14, February.
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  21. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  22. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
  23. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
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  26. Bennett T. McCallum, . "Role of the minimal state variable criterion in rational expectations models," GSIA Working Papers 1999-13, Carnegie Mellon University, Tepper School of Business.
  27. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October.
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  39. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
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