Inflation determination with Taylor rules: Is new-Keynesian analysis critically flawed?

Bennett McCallum

Journal of Monetary Economics, 2009, vol. 56, issue 8, 1101-1108

Abstract: Cochrane (2007) has strongly questioned the basic economic logic of current monetary policy analysis, arguing that New Keynesian (NK) models imply rational expectations paths with explosive inflation that do not imply explosions in real variables relevant for transversality conditions. Consequently, the usual logic does not rule out solutions with explosive inflation. That result does not, however, justify negative conclusions about NK analysis, for a different criterion is logically satisfactory. It is that, to be plausible, a RE solution must satisfy the property of least-squares learnability. Adoption of this criterion serves to justify in principle the bulk of current mainstream analysis.

Keywords: Determinacy; Transversality; Learnability; New; Keynesian; Explosive (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:8:p:1101-1108

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