The New Keynesian Model with Stochastically Varying Policies

Neusser, Klaus (March 2018). The New Keynesian Model with Stochastically Varying Policies (Discussion Papers 18-01). Bern: Department of Economics

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

UniBE Contributor:

Neusser, Klaus

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Discussion Papers

Publisher:

Department of Economics

Language:

English

Submitter:

Lars Tschannen

Date Deposited:

19 Feb 2021 14:50

Last Modified:

19 Feb 2021 14:50

JEL Classification:

C02, C61, E40, E52

BORIS DOI:

10.48350/145850

URI:

https://boris.unibe.ch/id/eprint/145850

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