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Determinacy in New Keynesian Models: a role for money after all?

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  • Minford, Patrick
  • Srinivasan, Naveen

Abstract

The New-Keynesian Taylor-Rule model of inflation determination with no role for money is incomplete. As Cochrane (2007a, b) argues, it has no credible mechanism for ruling out bubbles (or deal with the non-uniqueness problem that arises when the Taylor principle is violated) and as a result fails to provide a reason for private agents to pick a unique stable path. We propose a way forward. Our proposal is in effect that the New-Keynesian model should be formulated with a money demand and money supply function. It should also embody a terminal condition for money supply behaviour. If indeterminacy of stable (or unstable paths) occurred the central bank would switch to a money supply rule explicitly designed to stop it via the terminal condition. This would be therefore a `threat/trigger strategy' complementing the Taylor Rule --- only to be invoked if inflation misbehaved. Thus we answer the criticisms levelled at the Taylor Rule that it has no credible mechanism for dealing with these issues. However it does imply that money cannot be avoided in the new Keynesian set-up, contrary to Woodford (2008).

Suggested Citation

  • Minford, Patrick & Srinivasan, Naveen, 2010. "Determinacy in New Keynesian Models: a role for money after all?," CEPR Discussion Papers 7960, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7960
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    References listed on IDEAS

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
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    3. 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.
    4. Henderson, Dale W. & McKibbin, Warwick J., 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 221-317, December.
    5. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    6. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
    7. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    8. Minford, Patrick, 2008. "Commentary on Economic Projections and Rules of Thumb for Monetary Policy (by Athanasios Orphanides and Volker Wieland)," Cardiff Economics Working Papers E2008/16, Cardiff University, Cardiff Business School, Economics Section.
    9. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-687, August.
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    Citations

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    Cited by:

    1. Patrick Minford & Zhirong Ou & Michael Wickens, 2015. "Revisiting the Great Moderation: Policy or Luck?," Open Economies Review, Springer, vol. 26(2), pages 197-223, April.
    2. Patrick Minford & Naveen Srinivasan, 2015. "Can the Learnability Criterion Ensure Determinacy in New Keynesian Models?," South Asian Journal of Macroeconomics and Public Finance, , vol. 4(1), pages 43-61, June.
    3. Alho, Kari E.O., 2011. "How to Restore Sustainability of the Euro?," Discussion Papers 1259, The Research Institute of the Finnish Economy.
    4. Franz Seitz & Markus A. Schmidt, 2014. "Money In Modern Macro Models: A Review of the Arguments," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 156-174.
    5. Suneetha M. S., 2014. "Perspectives on Valuation of Biodiversity," Working Papers 2014-088, Madras School of Economics,Chennai,India.
    6. Bennett T. McCallum, 2012. "Determinacy, Learnability, Plausibility, and the Role of Money in New Keynesian Models," NBER Working Papers 18215, National Bureau of Economic Research, Inc.
    7. Luca Sessa, 2012. "Economic (in)stability under monetary targeting," Temi di discussione (Economic working papers) 858, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Determinacy; Money Supply; New-Keynesian; Taylor Rule; Terminal Condition;

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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