Resolving New Keynesian Anomalies with Wealth in the Utility Function / Pascal Michaillat, Emmanuel Saez.

Format:

Book

Author/Creator:

Michaillat, Pascal.

Contributor:

National Bureau of Economic Research.

Saez, Emmanuel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24971.

NBER working paper series no. w24971

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels, and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source--which resolves all the anomalies.

Notes:

Print version record

August 2018.