The Role of "Determinacy" in Monetary Policy Analysis
It is well known that the concept of "determinacy"-a single stable solution-plays a major role in contemporary monetary policy analysis. But while determinacy is desirable, other things equal, it is not necessary for a solution to be plausible and is not sufficient for a solution to be desirable. There is a related but distinct criterion of "learnability" that seems more crucial. This paper argues that recognition of information feasibility requires that a candidate solution must, to be plausible, be quantitatively learnable on the basis of information generated by the economy itself. Since a prominent least- squares(LS) learning process is highly "biased" toward learnability, it is reasonable to regard it as a necessary condition for any specific solution to be relevant. This implies that determinacy is not necessary for policy analysis; there may be more than one stable solution but only one that is LS learnable. Also, determinacy is not sufficient for satisfactory policy analysis; explosive solutions pertaining to nominal variables will not be eliminated by transversality conditions. For these and other reasons, the role of determinacy in monetary policy analysis should be reconsidered and substantially de-emphasized.
|Date of creation:||Aug 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.imes.boj.or.jp/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
- Bennett T. McCallum, 2006.
"E-Stability vis-a-vis Determinacy Results for a Broad Class of Linear Rational Expectations Models,"
NBER Working Papers
12441, National Bureau of Economic Research, Inc.
- 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.
- Cho, Seonghoon & McCallum, Bennett T., 2009. "Another weakness of "determinacy" as a selection criterion for rational expectations models," Economics Letters, Elsevier, vol. 104(1), pages 17-19, July.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Ben S. Bernanke & Michael Woodford, 1997.
"Inflation forecasts and monetary policy,"
Federal Reserve Bank of Cleveland, pages 653-686.
- Carlstrom, Charles T. & Fuerst, Timothy S., 2005.
"Investment and interest rate policy: a discrete time analysis,"
Journal of Economic Theory,
Elsevier, vol. 123(1), pages 4-20, July.
- Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
- Bennett McCallum, .
"Multiple-Solution Indeterminacies in Monetary Policy Analysis,"
GSIA Working Papers
2003-E77, Carnegie Mellon University, Tepper School of Business.
- McCallum, Bennett T., 2003. "Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1153-1175, July.
- Bennett T. McCallum, 2003. "Multiple-Solution Indeterminacies in Monetary Policy Analysis," NBER Working Papers 9837, 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.
- Bray, Margaret, 1982. "Learning, estimation, and the stability of rational expectations," Journal of Economic Theory, Elsevier, vol. 26(2), pages 318-339, April.
- Kurozumi, Takushi & Van Zandweghe, Willem, 2008. "Investment, interest rate policy, and equilibrium stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1489-1516, May.
- James Bullard & Kaushik Mitra, 2002.
"Learning about monetary policy rules,"
2000-001, Federal Reserve Bank of St. Louis.
- Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998.
"The perils of Taylor Rules,"
Departmental Working Papers
199831, Rutgers University, Department of Economics.
- Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "The Perils of Taylor Rules," CEPR Discussion Papers 2314, C.E.P.R. Discussion Papers.
- Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998. "The Perils of Taylor Rules," Working Papers 98-37, C.V. Starr Center for Applied Economics, New York University.
- James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
When requesting a correction, please mention this item's handle: RePEc:ime:imedps:09-e-17. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken)
If references are entirely missing, you can add them using this form.