Inflation Determination with Taylor Rules: Is New-Keynesian Analy.pdf.pdf' (163.57 kB)
Inflation Determination with Taylor Rules: Is New-Keynesian Analysis Critically Flawed?
journal contribution
posted on 2009-07-01, 00:00 authored by Bennett T. McCallumCochrane (2007) has strongly questioned the basic economic logic of current monetary
policy analysis, arguing that New Keynesian (NK) models imply rational expectations
paths with explosive inflation that do not imply explosions in real variables relevant for
transversality conditions. Consequently, the usual logic does not rule out solutions with
explosive inflation. That result does not, however, justify negative conclusions about
NK analysis, for a different criterion is logically satisfactory. It is that, to be plausible, a
RE solution must satisfy the property of least-squares learnability. Adoption of this
criterion serves to justify in principle the bulk of current mainstream analysis.