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

Bennett McCallum

No 18215, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: C61 C62 E37 E47 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-cba and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (6)

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