Discussion Paper Details
Please find the details for DP7960 in an easy to copy and paste format below:
Title: Determinacy in New Keynesian Models: a role for money after all?
Author(s): Patrick Minford and Naveen Srinivasan
Publication Date: August 2010
Keyword(s): Determinacy, Money Supply, New-Keynesian, Taylor Rule and Terminal Condition
Programme Area(s): International Macroeconomics
Abstract: The New-Keynesian Taylor-Rule model of inflation determination with no role for money is incomplete. As Cochrane (2007a, b) argues, it has no credible mechanism for ruling out bubbles (or deal with the non-uniqueness problem that arises when the Taylor principle is violated) and as a result fails to provide a reason for private agents to pick a unique stable path. We propose a way forward. Our proposal is in effect that the New-Keynesian model should be formulated with a money demand and money supply function. It should also embody a terminal condition for money supply behaviour. If indeterminacy of stable (or unstable paths) occurred the central bank would switch to a money supply rule explicitly designed to stop it via the terminal condition. This would be therefore a `threat/trigger strategy' complementing the Taylor Rule --- only to be invoked if inflation misbehaved. Thus we answer the criticisms levelled at the Taylor Rule that it has no credible mechanism for dealing with these issues. However it does imply that money cannot be avoided in the new Keynesian set-up, contrary to Woodford (2008).
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Minford, P and Srinivasan, N. 2010. 'Determinacy in New Keynesian Models: a role for money after all?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7960