Keynesian Economics without the Phillips Curve
We extend Farmer's (2012b) Monetary (FM) Model in three ways. First, we derive an analog of the Taylor Principle and we show that it fails in U.S. data. Second, we use the fact that the model displays dynamic indeterminacy to explain the real effects of nominal shocks. Third, we use the fact the model displays steady-state indeterminacy to explain the persistence of unemployment. We show that the FM model outperforms the NK model and we argue that its superior performance arises from the fact that the reduced form of the FM model is a VECM as opposed to a VAR.
We would like to thank participants at the UCLA macro and international finance workshops. We have both benefited from conversations with Konstantin Platonov. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Roger E.A. Farmer & Giovanni Nicolò, 2018. "Keynesian Economics Without the Phillips Curve," Journal of Economic Dynamics and Control, . citation courtesy of