NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inflation Determination with Taylor Rules: Is New Keynesian Analysis Critically Flawed?

Bennett T. McCallum

NBER Working Paper No. 14534
Issued in December 2008
NBER Program(s):   EFG   ME

Cochrane (2007) has strongly questioned the basic economic logic of current mainstream monetary policy analysis, arguing that the standard notion --that "determinacy" of a rational expectations (RE) equilibrium suffices to imply that stable inflation behavior will be generated -- is incorrect. This is because New Keynesian (NK) models are typically consistent with the existence of RE paths with explosive inflation rates (in addition to one or more stable paths) that normally do not imply explosions in real variables relevant for transversality conditions. Consequently, the usual logic does not imply the absence of explosive inflation. That result does not, however, justify negative conclusions about NK analysis. For there is a different criterion that is logically satisfactory for the purpose at hand. This is the requirement that, to be plausible, a RE solution must satisfy the property of least-squares learnability. Adoption of this criterion, which should be attractive to analysts concerned with actual monetary policy, serves to justify in principle the bulk of current mainstream analysis.

download in pdf format
   (163 K)

email paper

This paper is available as PDF (163 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14534

Published: McCallum, Bennett T., 2009. "Inflation determination with Taylor rules: Is new-Keynesian analysis critically flawed?," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1101-1108, November.

Users who downloaded this paper also downloaded these:
Cochrane w13409 Determinacy and Identification with Taylor Rules
Aizenman, Hutchison, and Noy w14561 Inflation Targeting and Real Exchange Rates in Emerging Markets
Logan w13870 Are Engel Curve Estimates of CPI Bias Biased?
Stock and Watson w14322 Phillips Curve Inflation Forecasts
Bordo and Eichengreen w14532 Bretton Woods and the Great Inflation
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us