scholarly journals The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?

2012 ◽  
Vol 79 (4) ◽  
pp. 1371-1406 ◽  
Author(s):  
O. Coibion ◽  
Y. Gorodnichenko ◽  
J. Wieland
Keyword(s):  
Lower Bound ◽  
Inflation Rate ◽  
Central Banks ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
New Keynesian Models ◽  
Inflation Targets

scholarly journals In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment

2019 ◽  
Vol 20 (4) ◽  
pp. e1028-e1053
Author(s):  
Piotr Ciżkowicz ◽  
Andrzej Rzońca ◽  
Andrzej Torój
Keyword(s):  
Side Effects ◽  
Lower Bound ◽  
Output Growth ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Slow Potential ◽  
Keynesian Model ◽  
High Inflation ◽  
Inflation Targets ◽  
Potential Output Growth

Abstract Using a standard New Keynesian model, we show that moderate side effects of zero lower bound (ZLB) policy suffice for positive lower bound (PLB) policy to pay off in terms of welfare, especially when central banks fail to commit. For given side effects of the ZLB, as the shock that makes the ZLB bind becomes larger and more persistent, the dominance of PLB policy over ZLB policy becomes more likely. The findings hold for flexible and rigid economies with both fast and slow potential output growth and low and high inflation targets.

scholarly journals REAL RIGIDITIES AND OPTIMAL STABILIZATION AT THE ZERO LOWER BOUND IN NEW KEYNESIAN ECONOMIES

2017 ◽  
Vol 23 (4) ◽  
pp. 1371-1400 ◽  
Author(s):  
Adiya Belgibayeva ◽  
Michal Horvath
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Optimal Policy ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Wage Setting ◽  
Optimal Stabilization ◽  
Labor Market Segmentation ◽  
Policy Responses ◽  
New Keynesian Models

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

scholarly journals The Macroeconomics of Trend Inflation

2014 ◽  
Vol 52 (3) ◽  
pp. 679-739 ◽  
Author(s):  
Guido Ascari ◽  
Argia M. Sbordone
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Positive Trend ◽  
Zero Lower Bound ◽  
Keynesian Model ◽  
Long Run ◽  
Trend Inflation ◽  
Inflation Targets

Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model, an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target. (JEL E12, E31, E32, E52, E58)

scholarly journals Resolving New Keynesian Anomalies with Wealth in the Utility Function

2019 ◽  
pp. 1-46 ◽  
Author(s):  
Pascal Michaillat ◽  
Emmanuel Saez
Keyword(s):  
Lower Bound ◽  
Utility Function ◽  
Social Status ◽  
Government Spending ◽  
Marginal Utility ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Low Levels

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.

A NOTE ON NOMINAL GDP TARGETING AND THE ZERO LOWER BOUND

2016 ◽  
Vol 21 (8) ◽  
pp. 2138-2157 ◽  
Author(s):  
Roberto M. Billi
Keyword(s):  
Lower Bound ◽  
Central Bank ◽  
Interest Rates ◽  
Price Level ◽  
Supply And Demand ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Supply And Demand Shocks ◽  
Keynesian Model ◽  
Nominal Interest Rates

I compare nominal gross domestic product (GDP) level targeting with strict price level targeting in a small New Keynesian model, with the central bank operating under optimal discretion and facing a zero lower bound on nominal interest rates. I show that, if the economy is only buffeted by purely temporary shocks to inflation, nominal GDP level targeting may be preferable because it requires the burden of the shocks to be shared by prices and output. However, in the presence of persistent supply and demand shocks, strict price level targeting may be superior because it induces greater policy inertia and improves the tradeoffs faced by the central bank. During lower bound episodes, somewhat paradoxically, nominal GDP level targeting leads to larger falls in nominal GDP.

scholarly journals On global determinacy of New Keynesian models

2021 ◽  
Author(s):  
Minseong Kim
Keyword(s):  
Inflation Rate ◽  
New Keynesian ◽  
State Variables ◽  
Output Level ◽  
Effective Demand ◽  
The Past ◽  
Endogenous Variables ◽  
New Keynesian Models ◽  
Global Equilibrium

New Keynesian models assume that inflation rate and output level are endogenous variables. However, given that firms are price setters and suppliers in the models, it is more reasonable to assume that, absent equilibrium coordination (or tatonnement) issues usually abstracted away, both variables actually are state variables determined by expectations in the past. This secures global equilibrium determinacy and a previously unavailable account of inflation rate for New Keynesian models. Furthermore, the principle of effective demand is implemented via the expectation channel.

scholarly journals Inflation Targets and the Zero Lower Bound in a Behavioural Macroeconomic Model

Economica ◽  
2018 ◽  
Vol 86 (342) ◽  
pp. 262-299 ◽  
Author(s):  
Paul De Grauwe ◽  
Yuemei Ji
Keyword(s):  
Lower Bound ◽  
Macroeconomic Model ◽  
Zero Lower Bound ◽  
Inflation Targets

scholarly journals INFORMATION VALUE OF THE INTEREST RATE AND THE ZERO LOWER BOUND

2019 ◽  
Vol 24 (7) ◽  
pp. 1758-1784
Author(s):  
Sang Seok Lee
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Information Structure ◽  
Information Value ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Keynesian Model ◽  
State Of The Economy ◽  
The Interest Rate ◽  
The Cost

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

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