Determinacy, Learnability, Plausibility, and the Role of Money in New Keynesian Models / Bennett T. McCallum.

By:

McCallum, Bennett T

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National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w18215.Publication details: Cambridge, Mass. National Bureau of Economic Research 2012.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Previous	nber w18212 Projection Bias in the Car and Housing Markets /	nber w18213 Individual Price Adjustment along the Extensive Margin /	nber w18214 Facing the Climate Change Challenge in a Global Economy /	nber w18215 Determinacy, Learnability, Plausibility, and the Role of Money in New Keynesian Models /	nber w18216 Adolescent Depression and Adult Labor Market Outcomes /	nber w18217 Inefficient Investment Waves /	nber w18218 Unions in a Frictional Labor Market /	Next

July 2012.

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.