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Working Paper 2008-007A

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"When Does Determinacy Imply Expectational Stability?"
by James B. Bullard, and Stefano Eusepi

We study the connections between determinacy of rational expectations equilibrium, and expectational stability or learnability of that equilibrium, in a relatively general New Keynesian model. Adoption of policies that induce both determinacy and learnability of equilibrium has been considered fundamental to successful policy in the literature. We ask what types of economic assumptions drive differences in the necessary and sufficient conditions for the two criteria. Our framework is sufficiently flexible to encompass lags in information, alternative pricing assumptions, a cost channel for monetary policy, and either Euler equation or infinite horizon approaches to learning. We are able to isolate conditions under which determinacy does and does not imply learnability, and also conditions under which long horizon forecasts make a clear difference to conclusions about expectational stability. The sharpest result is that informational delays break equivalence connections between determinacy and learnability.

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Category > Monetary Policy/Macroeconomics
Author > James B. Bullard