Discussion Paper Details
Please find the details for DP9039 in an easy to copy and paste format below:
Title: Can the learnability criterion ensure determinacy in New Keynesian Models?
Author(s): Patrick Minford and Naveen Srinivasan
Publication Date: July 2012
Keyword(s): determinacy, e-stability, learnability, new-Keynesian and Taylor Rule
Programme Area(s): International Macroeconomics
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.
For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9039
Minford, P and Srinivasan, N. 2012. 'Can the learnability criterion ensure determinacy in New Keynesian Models?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9039