scholarly journals Walk on the Wild Side: Temporarily Unstable Paths and Multiplicative Sunspots

2019 ◽  
Vol 109 (5) ◽  
pp. 1805-1842 ◽  
Author(s):  
Guido Ascari ◽  
Paolo Bonomolo ◽  
Hedibert F. Lopes
Keyword(s):  
Stochastic Volatility ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Inflation Dynamics ◽  
Generalized Model ◽  
Keynesian Model

We propose a generalization of the rational expectations framework to allow for temporarily unstable paths. Our approach introduces multiplicative sunspot shocks and it yields drifting parameters and stochastic volatility. Then, we provide an econometric strategy to estimate this generalized model on the data. The methodology allows the data to choose between different possible alternatives: determinacy, indeterminacy, and temporary instability. We apply our methodology to US inflation dynamics in the 1970s through the lens of a simple New Keynesian model. When temporarily unstable paths are allowed, the data unambiguously select them to explain the stagflation period in the 1970s. (JEL D84, E12, E31, E32, E52)

scholarly journals The effect of central bank credibility on forward guidance in an estimated New Keynesian model

2021 ◽  
pp. 1-39
Author(s):  
Stephen J. Cole ◽  
Enrique Martínez-García
Keyword(s):  
Central Bank ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Survey Of Professional Forecasters ◽  
Forward Guidance ◽  
Keynesian Model ◽  
The Us ◽  
Imperfect Credibility ◽  
Central Bank Credibility

Abstract This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

Inflation Dynamics in a New Keynesian Model

2000 ◽  
Vol 68 (1) ◽  
pp. 92-112
Author(s):  
Jonathan Ireland ◽  
Simon Wren-Lewis
Keyword(s):  
New Keynesian ◽  
New Keynesian Model ◽  
Inflation Dynamics ◽  
Keynesian Model

scholarly journals Inflation-Gap Persistence in the US

2010 ◽  
Vol 2 (1) ◽  
pp. 43-69 ◽  
Author(s):  
Timothy Cogley ◽  
Giorgio E. Primiceri ◽  
Thomas J. Sargent
Keyword(s):  
Stochastic Volatility ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Vector Autoregressions ◽  
Medium Term ◽  
Inflation Target ◽  
Keynesian Model ◽  
Trend Inflation ◽  
The Us ◽  
The Difference

We estimate vector autoregressions with drifting coefficients and stochastic volatility to investigate whether US inflation persistence has changed. We focus on the inflation gap, defined as the difference between inflation and trend inflation, and we measure persistence in terms of short- to medium-term predictability. We present evidence that inflation-gap persistence increased during the Great Inflation and that it fell after the Volcker disinflation. We interpret these changes using a dynamic new Keynesian model that highlights the importance of changes in the central bank's inflation target. (JEL E12, E31, E52, E58)

LEARNING THE INFLATION TARGET

2009 ◽  
Vol 13 (2) ◽  
pp. 167-188 ◽  
Author(s):  
Ricardo Nunes
Keyword(s):  
Rational Expectations ◽  
Solution Method ◽  
Phillips Curve ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Inflation Target ◽  
Rule Of Thumb ◽  
Keynesian Model

We propose a framework in which expectations have a rational and a learning component. We describe a solution method for these frameworks and provide an application to the Volcker disinflation with the New Keynesian model. Although the model with rational expectations does not seem to account for this episode, results improve when a small and empirically plausible proportion of private agents are learning. The learning component is argued to be more robust and plausible than the rule-of-thumb expectations present in the hybrid Phillips curve.

scholarly journals Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations

2021 ◽  
Vol 13 (2) ◽  
pp. 121-167
Author(s):  
Jordi Galí
Keyword(s):  
Monetary Policy ◽  
Rational Expectations ◽  
Overlapping Generations ◽  
Asset Price ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Keynesian Model ◽  
Welfare Implications

I analyze an extension of the New Keynesian model that features overlapping generations of finitely lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model’s welfare implications. (JEL E12, E32, E44, E52, E63)

scholarly journals INCREASING RETURNS AND THE DESIGN OF INTEREST RATE RULES

2007 ◽  
Vol 12 (1) ◽  
pp. 22-49 ◽  
Author(s):  
WEI XIAO
Keyword(s):  
Interest Rate ◽  
Empirical Research ◽  
Rational Expectations ◽  
Returns To Scale ◽  
Increasing Returns ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Interest Rate Rules ◽  
Increasing Returns To Scale ◽  
Keynesian Model

We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of equilibrium under Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the “Taylor principle” no longer guarantees either determinacy or E-stability of the rational expectations equilibrium.

WHAT WE DON'T KNOW ABOUT THE MONETARY TRANSMISSION MECHANISM AND WHY WE DON'T KNOW IT

2008 ◽  
Vol 12 (S1) ◽  
pp. 60-74 ◽  
Author(s):  
ANDREAS BEYER ◽  
ROGER E.A. FARMER
Keyword(s):  
Rational Expectations ◽  
Transmission Mechanism ◽  
New Keynesian ◽  
Monetary Transmission ◽  
Reduced Form ◽  
New Keynesian Model ◽  
Policy Rule ◽  
Policy Regime ◽  
Equivalent Models ◽  
Keynesian Model

We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Jess Benhabib and Roger Farmer is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models havedifferentimplications for the design of an optimal policy rule.

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