Working Paper: NBER ID: w23837
Authors: Roger E.A. Farmer; Giovanni Nicol
Abstract: 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.
Keywords: Keynesian Economics; Phillips Curve; Monetary Policy; Unemployment; Nominal Shocks
JEL Codes: E0; E12; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy responses (E52) | unemployment rates (J64) |
| nominal shocks (E39) | unemployment (J64) |
| FM model's analog of the Taylor principle (C51) | federal funds rate (E52) |
| aggregate demand shocks (E00) | unemployment (J64) |
| initial conditions (C62) | long-term outcomes in output and inflation (E31) |
| belief function in FM model (C29) | rational expectations equilibrium (D84) |
| FM model (E17) | persistence of unemployment (J64) |