The Discounted Euler Equation: A Note / Alisdair McKay, Emi Nakamura, Jón Steinsson.

Format:

Book

Author/Creator:

McKay, Alisdair.

Contributor:

National Bureau of Economic Research.

Nakamura, Emi.

Steinsson, Jón.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22129.

NBER working paper series no. w22129

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Discounted Euler Equation

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

We present a simple model with income risk and borrowing constraints which yields a "discounted Euler equation." This feature of the model mutes the extent to which news about far future real interest rates (i.e., forward guidance) affects current outcomes. We show that this simple model approximates the outcomes of a rich model with uninsurable income risk and borrowing constraints in response to a forward guidance shock. The model is simple enough to be easily incorporated into standard DSGE models. We illustrate this with an application to the zero lower bound.

Notes:

Print version record

March 2016.