HT - 03. NKM Equilibrium

Question 1

Blanchard and Kahn (1980)

Answer 1

Conclusion: criterion of equilibrium uniqueness and determinacy:

• # | eigenvalues | < 1 = # non-predetermined variables / jump variables

Question 2

Bullard and Mitra (2002)

Answer 2

Conclusion: necessary and sufficient conditions based on the trace and determinant of system matrix

• 2 variable system, no pre-determined

• | det(A) | < 1
• | - tr(A) | < 1 + det(A)

Question 3

Clarida, Galí and Gertler (2000)

Answer 3

Aim: estimate forward looking MP reaction function before and after Volcker’s appointment in US 1979

• Pre-Volcker Fed raised nominal rates by less than increase in expected inflation, allowing real rates to fall
o This weak policy opens up a “possibility of bursts of inflation and output” due to non-fundamental, sunspot shocks
• Under Volcker, real rates rose to temper down inflation

Conclusion: Volcker-Greenspan rule is stabilising – much more sensitive to changes in expected inflation.

Question 4

Christiano, Eichembaum and Evans (2005)

Answer 4

Conclusion: matching some quantitative features of empirical IRFs requires the basic NKM to be enriched in a number of dimensions. See above section in MT.