Ruling out unstable New Keynesian equilibria: A note

Michael Hatcher ()
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Michael Hatcher: University of Southampton

Economics Bulletin, 2026, vol. 46, issue 1, 25 - 33

Abstract: Aside from a knife-edge case, unstable nominal equilibria in New Keynesian models imply real explosions. We show how unstable nominal equilibria can be ruled out using a Taylor-type rule with a trigger strategy designed to prevent bubbles. Hence, a 'cashless' monetary policy ensures stable, determinate inflation. These results provide support for the convention of selecting the unique stable solution in the literature. We establish these results using a baseline, linear three-equation New Keynesian model, but the main conclusions are robust to some extensions and non-linearities.

Keywords: New Keynesian model; Taylor rule; Indeterminacy; Bubbles; Monetary policy (search for similar items in EconPapers)
JEL-codes: E5 E6 (search for similar items in EconPapers)
Date: 2026-03-30
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