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An Analytical Solution for the Interest Rate Reaction Function in a Neo- Keynesian Economy Using the Undetermined Coefficients Method

Arend, Mario (2007): An Analytical Solution for the Interest Rate Reaction Function in a Neo- Keynesian Economy Using the Undetermined Coefficients Method.

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Abstract

In this research note I propose the use of the undetermined coefficients method as an alternative approach to solve the Central Bank optimization problem in a neo-keynesian economy. The advantage of using this method is that it provides a theory as to how rational expectations are constructed, and how shocks in the economy are propagated, in order to find an analytical solution for the interest rate reaction function in an economy with a forward-looking behavior.

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