Resolving New Keynesian Anomalies with Wealth in the Utility Function. Michaillat, P. & Saez, E. 2019. Unpublished manuscriptLink abstract bibtex 4 downloads At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low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 social status. Since people save not only for future consumption but also 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 equilibrium at the zero lower bound transforms from a saddle to a source— which resolves all the anomalies.
@unpublished{MichaillatSaez2019,
title = {Resolving New Keynesian Anomalies with Wealth in the Utility Function},
author = {Michaillat, Pascal and Saez, Emmanuel},
year = {2019},
url = {https://eml.berkeley.edu/$\sim$saez/},
abstract = {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 social status. Since people save not only for future consumption but also 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 equilibrium at the zero lower bound transforms from a saddle to a source\textemdash which resolves all the anomalies.},
keywords = {Impacts of Wealth Inequality},
note = {Unpublished manuscript}
}
Downloads: 4
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