Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/201932 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7706
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper estimates a Behavioral New Keynesian model to revisit the evidence that passive US monetary policy in the pre-1979 sample led to indeterminate equilibria and sunspot-driven fluctuations, while active policy after 1982, by satisfying the Taylor principle, was instrumental in restoring macroeconomic stability. The model assumes “cognitive discounting”, i.e., consumers and firms pay less attention to variables further into the future. We estimate the model allowing for both determinacy and indeterminacy. The empirical results show that determinacy is preferred both before and after 1979. Even if monetary policy is found to react only mildly to inflation pre-Volcker, the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy.
Subjects: 
Behavioral New Keynesian model
cognitive discounting
estimation under determinacy and indeterminacy
Taylor principle
active vs passive monetary policy
JEL: 
E31
E32
E52
E58
E70
Document Type: 
Working Paper
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