Does the New Keynesian Model Have a Uniqueness Problem?
This paper addresses whether non-uniqueness of equilibrium is a substantive problem for the analysis of fiscal policy in New-Keynesian (NK) models at the zero lower bound (ZLB). There would be a substantive problem if there were no compelling way to select among different equilibria that give different answers to critical policy questions. We argue that learnability provides such a criterion. We study a fully non-linear NK model with Calvo pricing frictions. Our main finding is that the model we analyze has a unique E-stable rational expectations equilibrium at the ZLB. That equilibrium is also stable-under-learning and inherits all of the key properties of linearized NK models for fiscal policy.
We are very grateful for discussions with Anton Braun, Luca Dedola, George Evans, Pablo Guerron-Quintana, Karl Mertens, Giorgio Primiceri, Morten Ravn, and Mirko Wiederholt. We are particularly grateful to Marco Bassetto for encouraging us to consider learnability. The views expressed here are those of the authors and not the Board of Governors of the Federal Reserve System, the FOMC, anyone else associated with the Federal Reserve System, or the views of the National Bureau of Economic Research.
Non-Northwestern compensated activities: 2010 through 2017.
Short lecture courses at: Bank of Korea, International Monetary Fund, Kiel Institute for World Economics, Gerzensee Study Center, Central Bank of Peru, Central Bank of Portugal, Central Bank of Colombia, Central Bank of Hungary, Swiss National Bank, Central Bank of the Czech Republic, Renmin University, China, Shanghai Advanced Institute of Finance, Shanghai.
Consultant, Central Bank of Brazil, Swiss National Bank.
Federal Reserve Bank of Atlanta, advisor.
Federal Reserve Bank of Chicago, advisor.
Federal Reserve Bank of Minneapolis, advisor.
Consultant, Global Markets Institute at Goldman Sachs.Martin S. Eichenbaum