In http://www.uni-hamburg.de/fachbereiche-einrichtungen/fb03/iwwt/makro/slides3.pdf, you can see New Keynesian IS equation being solved forward to yield a formula for output gap (page 40 of the pdf slides). I do get that it is based on output gap becoming zero at infinity. But exactly what condition is this justification based on? Is it $\lim_{T \to \infty}E_t[\tilde{y_T}] = 0$? Or $E_t[\lim_{T \to \infty}\tilde{y_T}] = 0$ Or other conditions?

Also when getting the solution for new keyneisan models as done in later pages of the pdf (especially Blanchard-Kahn in page 44), if it is true that the above output gap formula depends on $\lim_{T \to \infty}E_t[\tilde{y_T}] = 0$ or $E_t[\lim_{T \to \infty}\tilde{y_T}] = 0$, does the solution mechanism also depend on these?


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.