Multiplicity in New Keynesian Models

Maksim Isakin () and Phuong V. Ngo ()
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Maksim Isakin: Cleveland State University
Phuong V. Ngo: Cleveland State University

Open Economies Review, 2022, vol. 33, issue 3, No 5, 505-521

Abstract: Abstract The common practice in monetary economics is to linearize a model around its deterministic equilibrium. In this paper, we show analytically that when central banks stabilize both output and inflation, a standard dynamic New Keynesian model has three deterministic equilibria under a realistic parameterization. One is associated with targeted inflation as is commonly found in the literature; the other two are associated with deflation and high inflation. Our findings suggest that empirical research should allow for multiple equilibria or regimes, including both the one with high inflation and the one with deflation, in modeling inflation dynamics.

Keywords: Multiple steady state; Multiple equilibria; New Keynesian model; Deflation; High inflation (search for similar items in EconPapers)
JEL-codes: C32 E37 E52 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11079-021-09643-5

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