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Indeterminacy, causality, and the foundations of monetary policy analysis

Summary

To be useful as a guide to behavior, a model that includes a relationship between x t and zt+1 must specify whether x t is influenced by the expectation at t of zt+1 or, that zt+1 is inertially influenced by x t . We show that, for a broad class of linear RE models, distinct causal specifications will be uniquely associated with distinct solutions. Alternatively, a solution refinement requiring continuity of solution coefficients with respect to basic parameters implies this same solution. For a given structure there is only one RE solution that is fully consistent with the model’s specification.

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The author is indebted to Katrin Assenmacher, Seonghoon Cho, Holger Sieg, and Cédric Tille for comments on earlier drafts.

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Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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McCallum, B.T. Indeterminacy, causality, and the foundations of monetary policy analysis. Swiss J Economics Statistics 146, 107–120 (2010). https://doi.org/10.1007/BF03399296

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JEL-Classification

  • C61
  • C62
  • E37

Keywords

  • Causality
  • Indetermacy
  • Relational Expectations Equilibria