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Can the Learnability Criterion Ensure Determinacy in New Keynesian Models?

Author

Listed:
  • Patrick Minford

    (Cardiff Business School and CEPR, United Kingdom)

  • Naveen Srinivasan

    (Madras School of Economics)

Abstract

Forward-looking RE models such as the popular New Keynesian (NK) model do not provide a unique prediction about how the model economy behaves. We need some mechanism that ensures determinacy. McCallum (2012) says it is not needed because models are learnable only with the determinate solution and so the NK model, once learnt in this way, will be determinate. We agree: the only learnable solution that has agents converge on the true NK model is the bubble-free one. But once they have converged they must then understand the model and its full solution therefore including the bubble. Hence the learnability criterion still fails to pick a unique RE solution in NK models.

Suggested Citation

  • Patrick Minford & Naveen Srinivasan, 2014. "Can the Learnability Criterion Ensure Determinacy in New Keynesian Models?," Working Papers 2014-087, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2014-087
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    References listed on IDEAS

    as
    1. Patrick Minford & Naveen Srinivasan, 2011. "Determinacy in New Keynesian Models: A Role for Money after All?," International Finance, Wiley Blackwell, vol. 14(2), pages 211-229, June.
    2. 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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    8. 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.
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    More about this item

    Keywords

    India; New-Keynesian; Taylor Rule; Determinacy; E-stability; Learnability;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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