The Four Equation New Keynesian Model / Eric R. Sims, Jing Cynthia Wu.

Format:

Book

Author/Creator:

Sims, Eric R.

Contributor:

National Bureau of Economic Research.

Wu, Jing Cynthia.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26067.

NBER working paper series no. w26067

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

This paper develops a New Keynesian model featuring financial intermediation, short and long term bonds, credit shocks, and scope for unconventional monetary policy. The log-linearized model reduces to four key equations - a Phillips curve, an IS equation, and policy rules for the short term nominal interest rate and the central bank's long bond portfolio (QE). The four equation model collapses to the standard three equation New Keynesian model under a simple parameter restriction. Credit shocks and QE appear in both the IS and Phillips curves. Optimal monetary policy entails adjusting the short term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. The ability of the central bank to engage in QE significantly mitigates the costs of a binding zero lower bound.

Notes:

Print version record

July 2019.