The New Keynesian Model with Stochastically Varying Policies

Klaus Neusser ()

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

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.

Keywords: time{varying rational expectations models; New Keynesian model; Taylor rule; Lyapunov exponents; multiplicative ergodic theorem (search for similar items in EconPapers)
JEL-codes: C02 C61 E40 E52 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-dge, nep-mac, nep-ore and nep-upt
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