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The New Keynesian Model with Stochastically Varying Policies

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  • Klaus Neusser

Abstract

The Multiplicative Ergodic Theorem provides a novel general method- ology to analyze rational expectations models with stochastically vary- ing coecients. The approach is applied for the first time to economics and analyzes the canonical New Keynesian model with a Taylor rule which switches randomly between an aggressive and a passive reaction to in ation. The paper delineates the trade-o of the central bank of being passive in some periods and aggressive in others. Moreover, it is shown how this trade-o depends on the stochastic process governing the randomness in the central bank's policy. Finally, explicit solution formulas are derived in the case of determinateness as well as inde- terminateness. In doing so he paper considerably extends the current approach.

Suggested Citation

  • Klaus Neusser, 2018. "The New Keynesian Model with Stochastically Varying Policies," Diskussionsschriften dp1801, Universitaet Bern, Departement Volkswirtschaft.
  • Handle: RePEc:ube:dpvwib:dp1801
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    References listed on IDEAS

    as
    1. Lars E.O. Svensson & Stefan Laseen, 2009. "Anticipated Alternative Instrument-Rate Paths in Policy Simulations," 2009 Meeting Papers 788, Society for Economic Dynamics.
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    3. Galí, Jordi, 2011. "Are central banks' projections meaningful?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 537-550.
    4. Foerster, Andrew & Rubio-Ramírez, Juan Francisco & Waggoner, Daniel F & Zha, Tao, 2013. "Perturbation Methods for Markov-Switching DSGE Models," CEPR Discussion Papers 9464, C.E.P.R. Discussion Papers.
    5. Xiaoshan Che & Eric M. Leepe & Campbell Leith, 2015. "US Monetary and Fiscal Policies - conflict or cooperation?," Working Papers 2015_14, Business School - Economics, University of Glasgow.
    6. Chen, Xiaoshan & Leeper, Eric M. & Leith, Campbell, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-77, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Barthélemy, Jean & Marx, Magali, 2017. "Solving endogenous regime switching models," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 1-25.
    8. Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), 2012. "The Taylor Rule and the Transformation of Monetary Policy," Books, Hoover Institution, Stanford University, number 4, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    time{varying rational expectations models; New Keynesian model; Taylor rule; Lyapunov exponents; multiplicative ergodic theorem;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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