Determinacy, Learnability, Plausibility, and the Role of Money in New Keynesian Models

29 Pages Posted: 14 Jul 2012

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: July 2012

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.

Suggested Citation

McCallum, Bennett T., Determinacy, Learnability, Plausibility, and the Role of Money in New Keynesian Models (July 2012). NBER Working Paper No. w18215, Available at SSRN: https://ssrn.com/abstract=2105962

Bennett T. McCallum (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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