INTEREST RATE RULES AND EQUILIBRIUM STABILITY UNDER DEEP HABITS

2013 ◽  
Vol 18 (1) ◽  
pp. 23-40 ◽  
Author(s):  
Sarah Zubairy
Keyword(s):  
Interest Rate ◽  
Multiple Equilibria ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Interest Rate Rules ◽  
Keynesian Model ◽  
Interest Rate Rule ◽  
Countercyclical Markups ◽  
High Degree ◽  
Very High

This paper studies the determinacy of equilibrium in a new Keynesian model with deep habits under different interest rate rules. The main finding is that an interest rate rule satisfying the Taylor principle is no longer a sufficient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly enlarges the regions of determinacy. However, under all the simple interest rate rules considered, determinacy is not guaranteed for a very high degree of deep habits. Deep habits give rise to countercyclical markups, which is in line with empirical evidence and makes them an appealing feature in the study of demand shocks. The countercyclicality of markups also leads to multiple equilibria because of self-fulfilling expectations for a high degree of deep habit formation.

scholarly journals INCREASING RETURNS AND THE DESIGN OF INTEREST RATE RULES

2007 ◽  
Vol 12 (1) ◽  
pp. 22-49 ◽  
Author(s):  
WEI XIAO
Keyword(s):  
Interest Rate ◽  
Empirical Research ◽  
Rational Expectations ◽  
Returns To Scale ◽  
Increasing Returns ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Interest Rate Rules ◽  
Increasing Returns To Scale ◽  
Keynesian Model

We introduce increasing returns to scale into an otherwise standard New Keynesian model with capital, and study the determinacy and E-stability of equilibrium under Taylor-type interest rate rules. With very mild increasing returns supported by empirical research, the conventional wisdom regarding the design of interest rate rules can be overturned. In particular, the “Taylor principle” no longer guarantees either determinacy or E-stability of the rational expectations equilibrium.

scholarly journals RAMSEY OPTIMAL POLICY IN THE NEW-KEYNESIAN MODEL WITH PUBLIC DEBT

2021 ◽  
pp. 1-27
Author(s):  
Jean-Bernard Chatelain ◽  
Kirsten Ralf
Keyword(s):  
Public Debt ◽  
Optimal Policy ◽  
Multiple Equilibria ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
Simple Rules ◽  
Debt Dynamics ◽  
Level Versus ◽  
The Interest Rate

In the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-rule parameter implies the local stability of public-debt dynamics (“passive” fiscal policy).

Money and Credit in the New Keynesian Model

2014 ◽  
Vol 65 (3) ◽  
Author(s):  
Sven Offick ◽  
Hans-Werner Wohltmann
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Banking Sector ◽  
New Keynesian ◽  
Credit Channel ◽  
New Keynesian Model ◽  
Static Approximation ◽  
Keynesian Model ◽  
The Interest Rate

AbstractThis paper integrates a money and credit market into a static approximation of the baseline New Keynesian model based on a money-and-credit-in-the-utility approach, in which real balances and borrowing contribute to the household’s utility. In this framework, the central bank has no direct control over the interest rate on bonds. Instead, the central bank’s instrument variables are the monetary base and the refinancing rate, i. e. the rate at which the central bank provides loans to the banking sector. Our approach gives rise to a credit channel, in which current and expected future interest rates on the bond and loan market directly affect current goods demand. The credit channel amplifies the output effects of isolated monetary disturbances. Taking changes in private (inflation and interest rate) expectations into account, we find that - contrarily to BERNANKE and BLINDER (1988) - the credit channel may also dampen the output effects of monetary disturbances. The expansionary effects of a monetary expansion may be substantially diminished if the monetary disturbance is accompanied by a contractionary credit shock. In a dynamic version of our model, in which expectations are formed endogenously, we find that the credit channel amplifies output responses.

scholarly journals Discretionary policy and multiple equilibria in a new Keynesian model

2019 ◽  
Author(s):  
Volker Hahn
Keyword(s):  
Rational Expectations ◽  
Multiple Equilibria ◽  
Alternative Explanation ◽  
New Keynesian ◽  
Macroeconomic Fluctuations ◽  
Economic Fundamentals ◽  
Keynesian Model ◽  
Endogenous Variables ◽  
New Policies ◽  
High Degree

Abstract We show that discretionary policymaking can lead to multiple rational-expectations equilibria where the central bank responds to inflation sentiments, which are driven by past endogenous variables but are unrelated to current economic fundamentals. Some of these equilibria have favourable consequences for welfare, resulting in outcomes superior even to those achieved under timeless-perspective commitment. Inflation sentiments also provide a novel explanation for the sizeable macroeconomic fluctuations in many countries in the 1970s. Compared to interest-rate rules violating the Taylor principle, our explanation has the advantage of providing a rationale for why central banks that are confronted with inefficiently large macroeconomic fluctuations may not be able to deviate to new policies with superior macroeconomic outcomes. Moreover, we show that our approach provides an alternative explanation for the high degree of inflation persistence found in the data.

scholarly journals The Four Equation New Keynesian Model

2021 ◽  
pp. 1-45
Author(s):  
Eric Sims ◽  
Jing Cynthia Wu ◽  
Ji Zhang
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Short Term ◽  
Natural Rate ◽  
Keynesian Model ◽  
Bond Portfolio ◽  
Linearized Model ◽  
Credit Shocks

Abstract 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 equations – Phillips and IS curves as well as policy rules for the short-term interest rate and the central bank's long-bond portfolio (QE). Credit shocks and QE appear in both the IS and Phillips curves. In equilibrium, optimal monetary policy entails adjusting the short-term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. Use of QE significantly mitigates the costs of a binding zero lower bound.

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