Can the Learnability Criterion Ensure Determinacy in New Keynesian Models?

17 Pages Posted: 28 Sep 2012

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Naveen Srinivasan

Cardiff University Business School

Date Written: July 2012

Abstract

Forward-looking RE models such as the popular New Keynesian (NK) model do not provide a unique prediction about how the model economy behaves. We need some mechanism that ensures determinacy. McCallum (2011) says it is not needed because models are learnable only with the determinate solution and so the NK model, once learnt in this way, will be determinate. We agree: the only learnable solution that has agents converge on the true NK model is the bubble-free one. But once they have converged they must then understand the model and its full solution therefore including the bubble. Hence the learnability criterion still fails to pick a unique RE solution in NK models.

Keywords: determinacy, e-stability, learnability, new-Keynesian, Taylor Rule

JEL Classification: C62, D84

Suggested Citation

Minford, Patrick and Srinivasan, Naveen K., Can the Learnability Criterion Ensure Determinacy in New Keynesian Models? (July 2012). CEPR Discussion Paper No. DP9039, Available at SSRN: https://ssrn.com/abstract=2153470

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

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+44 29 2087 5728 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Naveen K. Srinivasan

Cardiff University Business School ( email )

Colum Drive
Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 029 2087 6545 (Phone)
+44 029 2087 4419 (Fax)

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