Working Paper: NBER ID: w9837
Authors: Bennett T. McCallum
Abstract: This paper discusses four current topics in monetary policy analysis, each of which hinges on the possibility of multiple solutions in rational expectations (RE) models. In three of these cases--involving inflation forecast targeting, the zero-lower bound deflation trap, and the fiscal theory of the price level--analysis based on E-stability and adaptive learnability of the solutions suggests that only one of them is a viable equilibrium candidate. Thus the dangers alleged to prevail, in these cases, are not ones with which actual policymakers need to be concerned. In the case of the Taylor principle, by contrast, policy behavior that violates the principle is genuinely undesirable, since all of the RE equilibria fail to be learnable.
Keywords: No keywords provided
JEL Codes: E3; E5; C6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation forecast targeting, zero-lower bound deflation trap, fiscal theory of the price level (E31) | unique equilibrium solution (C62) |
| only one equilibrium solution emerges as viable (C62) | plausible solution is the minimum-state-variable (MSV) solution (C32) |
| violation of the Taylor principle (E31) | all rational expectations equilibria being unlearnable (D84) |
| adherence to the Taylor principle (E61) | economic stability (E63) |