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"New Keynesian macroeconomists duck this problem, by suddenly reverting to Monetarist reasoning and just assuming that people expect the economy eventually to converge to potential output. But this is not a Monetarist model, in which the central bank has a monetary target."

Are you saying that the only way people would expect the economy to converge to potential output is if the central bank had a monetary target?

Nick Edmonds: not quite. It has to be a target with $ in the units, Money, price of gold, level of NGDP, something like that. To make the LM slope up and the AD slope down.

If we have starting values for all the nominal variables and the model dictates the path, then shouldn't things like the money supply (or any other $ variable) be determinate, even if they are not explicit targets? The rational optimizers who inhabit these types of models should be able to know what the money supply is going to be at any point, without it needing to be a target.

Nick Edmonds: but (in this case) the model does not dictate the path. That's the indeterminacy problem.

Nick Edmonds: not quite. It has to be a target with $ in the units, Money, price of gold, level of NGDP, something like that. To make the LM slope up and the AD slope down.


Nick Rowe: Could the central bank target an interest expense instead of interest rate? The interest rate has units $ paid / ( $ borrowed * unit of time ) where as interest expense would be $ paid / unit of time. With an interest rate the $ cancel in numerator and denominator where as with an interest expense the $ units are retained in the numerator.

Frank: in some circumstances no. In other circumstances yes, but it would be a really stupid target.

But do you meet the prerequisite for this course? If not, you are only allowed to audit.

:-)

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