Re-assessing New Keynesian paradox of flexibility

Kim, Minseong (2019): Re-assessing New Keynesian paradox of flexibility.

Abstract

We argue that the paradox of flexibility - that more flexible price results in worse outcomes when zero lower bound is binding - is ruled out once we consider an implicit equilibrium selection mechanism used when solving a New Keynesian model often not explicitly stated - the symmetric limit condition. Dropping the implicit mechanism leads to extraneous multiple equilibria, and breakdown of New Keynsian Phillips curve. The standard equilibrium selection in zero lower bound circumstances is questioned, given the symmetric limit condition.

• Item Type: MPRA Paper
• Language: English
• Keywords: paradox of flexibility; zero lower bound; symmetry condition; New Keynesian economics; multiple equilibria; equilibrium selection
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics; B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B41 - Economic Methodology; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

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