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| Michael Hatcher |
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| ''Ruling out unstable New Keynesian equilibria: A note'' |
| ( 2026, Vol. 0 No.0 ) |
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| Aside from a knife-edge case, unstable nominal equilibria in New Keynesian models imply real explosions. We show how unstable nominal equilibria can be ruled out using a Taylor-type rule with a trigger strategy designed to prevent bubbles. Hence, a 'cashless' monetary policy ensures stable, determinate inflation. These results provide support for the convention of selecting the unique stable solution in the literature. We establish these results using a baseline, linear three-equation New Keynesian model, but the main conclusions are robust to some extensions and non-linearities. |
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| Keywords: New Keynesian model, Taylor rule, Indeterminacy, Bubbles, Monetary policy
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JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General |
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| Manuscript Received : Feb 28 2025 | | Manuscript Accepted : Apr 27 2026 |
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