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Re-assessing New Keynesian paradox of flexibility

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

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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.

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