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Multiplicity in New Keynesian Models

Author

Listed:
  • Maksim Isakin

    (Cleveland State University)

  • Phuong V. Ngo

    (Cleveland State University)

Abstract

The common practice in monetary economics is to linearize a model around its deterministic equilibrium. In this paper, we show analytically that when central banks stabilize both output and inflation, a standard dynamic New Keynesian model has three deterministic equilibria under a realistic parameterization. One is associated with targeted inflation as is commonly found in the literature; the other two are associated with deflation and high inflation. Our findings suggest that empirical research should allow for multiple equilibria or regimes, including both the one with high inflation and the one with deflation, in modeling inflation dynamics.

Suggested Citation

  • Maksim Isakin & Phuong V. Ngo, 2022. "Multiplicity in New Keynesian Models," Open Economies Review, Springer, vol. 33(3), pages 505-521, July.
    • Handle: RePEc:kap:openec:v:33:y:2022:i:3:d:10.1007_s11079-021-09643-5
    DOI: 10.1007/s11079-021-09643-5
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    More about this item

    Keywords

    Multiple steady state; Multiple equilibria; New Keynesian model; Deflation; High inflation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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