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Inflation Determination with Taylor Rules: A Critical Review
"... The new-Keynesian, Taylor-rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly stabilize future inflation. Rather, the Fed threatens hyperinflation or deflation, unless inflation jumps to one particular val ..."
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Cited by 46 (5 self)
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The new-Keynesian, Taylor-rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly stabilize future inflation. Rather, the Fed threatens hyperinflation or deflation, unless inflation jumps to one particular value on each date. However, there is nothing in economics to rule out hyperinflationary or deflationary solutions. Therefore, inflation is just as indeterminate under “active ” interest rate targets as it is under standard fixed interest rate targets. Inflation determination requires ingredients beyond an interest-rate policy that follows the Taylor principle.
Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation.” National Bureau of Economic Research Working Paper 14621
, 2008
"... Abstract: With positive trend inflation, the Taylor principle does not guarantee a determinate equilibrium. We provide new theoretical results on determinacy in New Keynesian models with positive trend inflation and new empirical findings on the Federal Reserve’s reaction function before and after t ..."
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Cited by 44 (11 self)
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Abstract: With positive trend inflation, the Taylor principle does not guarantee a determinate equilibrium. We provide new theoretical results on determinacy in New Keynesian models with positive trend inflation and new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle before Volcker, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy switched to determinacy during the Volcker disinflation, and 3) the switch reflected changes in the Fed’s response to macroeconomic variables and the decline in trend inflation.
2010a) Local identification in DSGE models
- Journal of Monetary Economics
"... The issue of parameter identification arises whenever structural models are estimated. This paper develops a simple condition for local identification in linearized DSGE models. The condition is necessary and sufficient for identification with likelihood-based methods under normality, or with limite ..."
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Cited by 34 (1 self)
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The issue of parameter identification arises whenever structural models are estimated. This paper develops a simple condition for local identification in linearized DSGE models. The condition is necessary and sufficient for identification with likelihood-based methods under normality, or with limited information methods that utilize only second moments of the data. Using the methodology developed in the paper researchers can answer, prior to estimation, the following questions: which parameters are locally identified and which are not; is the identification failure due to data limitations, such as a lack of observations for some variables, or is it intrinsic to the structure of the model.
Can Learnability Save New-Keynesian Models
- Journal of Monetary Economics
"... Bennett McCallum (2009), applying Evans and Honkapohja’s (2001) results, argues that “learnability ” can save New-Keynesian models from their indeterminacies. He claims the unique bounded equilibrium is learnable, and the explosive equilibria are not. However, he assumes that agents can directly obs ..."
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Cited by 13 (1 self)
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Bennett McCallum (2009), applying Evans and Honkapohja’s (2001) results, argues that “learnability ” can save New-Keynesian models from their indeterminacies. He claims the unique bounded equilibrium is learnable, and the explosive equilibria are not. However, he assumes that agents can directly observe the monetary policy shock. Reversing this assumption, I find the opposite result: the bounded equilibrium is not learnable and the unbounded equilibria are learnable. More generally, I argue that a threat by the Fed to move to an “unlearnable” equilibrium for all but one value of inflation is a poor foundation for choosing the bounded equilibrium of a New-Keynesian model.
2011): “Dynamic Identification of DSGE Models
- Econometrica
, 1995
"... Abstract This paper studies structural identification of parameters of a DSGE model from the first and second moments of the data. Classical results for dynamic simultaneous equations do not apply because the state space solution of the model does not constitute a standard reduced form. The rank of ..."
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Cited by 6 (0 self)
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Abstract This paper studies structural identification of parameters of a DSGE model from the first and second moments of the data. Classical results for dynamic simultaneous equations do not apply because the state space solution of the model does not constitute a standard reduced form. The rank of the Jacobian matrix of derivatives with respect to the parameters is necessary but not sufficient for identification. We use restrictions implied by observational equivalence to obtain two sets of rank and order conditions: one for stochastically singular and another for non-singular models. Measurement errors, mean, long run, and a priori restrictions can be accommodated. An example is considered to illustrate the results.
Is the New Keynesian Explanation of the Great Dis-Inflation Consistent with the Cross Country Data?∗
, 2010
"... A leading explanation of long run U.S. inflation trends attributes both the fall of inflation in the 1980s and the subsequent years of low and stable inflation to well run monetary policy pinning down inflation-ary expectations. Most other OECD economies experienced a similar rise and fall of inflat ..."
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A leading explanation of long run U.S. inflation trends attributes both the fall of inflation in the 1980s and the subsequent years of low and stable inflation to well run monetary policy pinning down inflation-ary expectations. Most other OECD economies experienced a similar rise and fall of inflation, as well as subsequent low and stable inflation over the same period. This observation has been under-explored in the literature. In this paper we exploit the international dimension of the fall of inflation to investigate the hypothesis that good monetary policy is responsible for recent inflation outcomes. Our results suggest that this theory is not compatible with the cross country data.
IDENTIFYING THE MONETARY POLICY TRANSMISSION MECHANISM AND EVALUATING THE MCCALLUM RULE AS
"... This thesis may be consulted by you, provided you comply with the provisions of the Act and the following conditions of use: you will use the copy only for the purposes of research or private study you will recognise the author's right to be identified as the author of the thesis and due ack ..."
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This thesis may be consulted by you, provided you comply with the provisions of the Act and the following conditions of use: you will use the copy only for the purposes of research or private study you will recognise the author's right to be identified as the author of the thesis and due acknowledgement will be made to the author where appropriate you will obtain the author's permission before publishing any material from the thesis.
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"... Evaluating the strength of identification in DSGE models. An a priori approach ..."
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Evaluating the strength of identification in DSGE models. An a priori approach
Instrumental variable estimation of a nonlinear Taylor rule
, 2010
"... This paper studies nonlinear, threshold, models in which some of the regressors can be endogenous. An estimation strategy based on instrumental variables was originally developed for dynamic panel models and we extend it to time series models. We apply this methodology to a forward-looking Taylor ru ..."
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This paper studies nonlinear, threshold, models in which some of the regressors can be endogenous. An estimation strategy based on instrumental variables was originally developed for dynamic panel models and we extend it to time series models. We apply this methodology to a forward-looking Taylor rule where nonlinearity is introduced via inflation thresholds.
