Fed paper challenges New Keynesian orthodoxy
Central bank models may produce paradoxes, paper warns
The assumptions underpinning central bank models worldwide can create "somewhat extreme and implausible results", which are subsequently used to inform policy-making, according to research published yesterday (April 16) by the Federal Reserve.
The working paper, Policy paradoxes in the New Keynesian model, by Michael Kiley, an associate director in the office of financial stability policy and research, compares the conclusions of the widely used sticky-price formulation, with an alternative
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