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Determinacy, Learnability, Plausibility, and the Role of Money in New Keynesian Models

  • Bennett T. McCallum

Recent mainstream monetary policy analysis focuses on rational expectation solutions that are uniquely stable. A number of recent studies have examined the question of whether typical New Keynesian (NK) models, with policy rules that satisfy the Taylor principle, also exhibit solutions with explosive inflation that cannot be ruled out by any transversality condition or any other generally accepted economic principle. This paper contributes to that debate by supporting and developing previous arguments suggesting that such explosive solutions are informationally infeasible. It also critiques prevailing notions of "determinancy" and outlines two alternative approaches to solution selection.

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File URL: http://www.nber.org/papers/w18215.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18215.

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Date of creation: Jul 2012
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Handle: RePEc:nbr:nberwo:18215
Note: EFG ME
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  2. Minford, Patrick & Srinivasan, Naveen, 2009. "Determinacy in New Keynesian models: a role for money after all?," Cardiff Economics Working Papers E2009/21, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2011.
  3. Cho, Seonghoon & Moreno, Antonio, 2011. "The forward method as a solution refinement in rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 257-272, March.
  4. Flood, Robert P & Garber, Peter M, 1980. "An Economic Theory of Monetary Reform," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 24-58, February.
  5. Kaushik Mitra & Seppo Honkapohja, 2004. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," Royal Holloway, University of London: Discussion Papers in Economics 04/13, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  6. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  7. Minford, Patrick & Srinivasan, Naveen, 2011. "Ruling out unstable equilibria in New Keynesian models," Economics Letters, Elsevier, vol. 112(3), pages 247-249, September.
  8. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13410, National Bureau of Economic Research, Inc.
  9. Bennett T. Mccallum, 2011. "Causality, Structure And The Uniqueness Of Rational Expectations Equilibria," Manchester School, University of Manchester, vol. 79(s1), pages 551-566, 06.
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