The New Keynesian Model with Stochastically Varying Policies

Neusser, Klaus (2018). The New Keynesian Model with Stochastically Varying Policies (Unpublished) Bern: Universität Bern, Departement Volkswirtschaftslehre

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The Multiplicative Ergodic Theorem provides a novel general methodology to analyze rational expectations models with stochastically varying coefficients. The approach is applied for the first time to economics and analyzes the canonical New Keynesian model with a Taylor rule which switches randomly between an aggressive and a passive reaction to inflation. The paper delineates the trade-off of the central bank of being passive in some periods and aggressive in others. Moreover, it is shown how this trade-off depends on the stochastic process governing the randomness in the central bank’s policy. Finally, explicit solution formulas are derived in the case of determinateness as well as indeterminateness. In doing so he paper considerably extends the current approach.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Neusser, Klaus

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Publisher:

Universität Bern, Departement Volkswirtschaftslehre

Language:

English

Submitter:

Dino Collalti

Date Deposited:

07 Oct 2019 11:04

Last Modified:

12 Nov 2019 15:49

BORIS DOI:

10.7892/boris.129922

URI:

https://boris.unibe.ch/id/eprint/129922

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