scholarly journals The State of New Keynesian Economics: A Partial Assessment

2018 ◽  
Vol 32 (3) ◽  
pp. 87-112 ◽  
Author(s):  
Jordi Galí
Keyword(s):  
Interest Rates ◽  
Global Financial Crisis ◽  
Academic Research ◽  
The State ◽  
New Keynesian ◽  
Future Research ◽  
New Keynesian Model ◽  
Keynesian Economics ◽  
Keynesian Model ◽  
Dynamic Stochastic

In August 2007, when the first signs emerged of what would come to be the most damaging global financial crisis since the Great Depression, the New Keynesian paradigm was dominant in macroeconomics. Ten years later, tons of ammunition has been fired against modern macroeconomics in general, and against dynamic stochastic general equilibrium models that build on the New Keynesian framework in particular. Those criticisms notwithstanding, the New Keynesian model arguably remains the dominant framework in the classroom, in academic research, and in policy modeling. In fact, one can argue that over the past ten years the scope of New Keynesian economics has kept widening, by encompassing a growing number of phenomena that are analyzed using its basic framework, as well as by addressing some of the criticisms raised against it. The present paper takes stock of the state of New Keynesian economics by reviewing some of its main insights and by providing an overview of some recent developments. In particular, I discuss some recent work on two very active research programs: the implications of the zero lower bound on nominal interest rates and the interaction of monetary policy and household heterogeneity. Finally, I discuss what I view as some of the main shortcomings of the New Keynesian model and possible areas for future research.

scholarly journals Optimal Forward Guidance

2019 ◽  
Vol 11 (4) ◽  
pp. 310-345 ◽  
Author(s):  
Florin O. Bilbiie
Keyword(s):  
Interest Rates ◽  
Dynamic Stochastic General Equilibrium ◽  
Bad News ◽  
New Keynesian ◽  
Simple Rule ◽  
New Keynesian Model ◽  
Liquidity Trap ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Dynamic Stochastic

Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule “announce a duration of half of the trap’s duration times the disruption” is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment. (JEL D84, E12, E43, E52, E56)

ARE MAJOR CENTRAL BANKS BLINDED BY THE ANALYTICAL ELEGANCE OF THEIR MODELS? POSSIBLE COSTS OF UNCONVENTIONAL MONETARY POLICY MEASURES

2017 ◽  
Vol 62 (01) ◽  
pp. 87-108 ◽  
Author(s):  
PIOTR CIŻKOWICZ ◽  
ANDRZEJ RZOŃCAZ
Keyword(s):  
Monetary Policy ◽  
Global Financial Crisis ◽  
Significant Risk ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Unconventional Monetary Policy ◽  
Keynesian Model ◽  
Policy Measures ◽  
The Global Financial Crisis

We survey the possible costs of the unconventional monetary policy measures undertaken by major central banks after the outbreak of the global financial crisis in 2008. We argue that these costs are not easily discernable in the new Keynesian (NK) model, which defines a theoretical framework for monetary policy. First, the costs may result from the effects of unconventional monetary policy measures on the intensity of restructuring and the persistence of uncertainty (which increased after the outbreak of the crisis). However, neither of these processes is considered in the new Keynesian model. Second, costs may be generated not only by distortions in the choices made by economic agents but may also be a result of the decisions made by governments, particularly in terms of the fiscal deficit level. However, the new Keynesian model does not consider the effects of unconventional monetary policy measures on the quality of fiscal policy. Without carefully considering the costs, there is a significant risk that unconventional monetary policy measures could become a conventional response to recurrent crises.

Estimation of Macro-financial Linkages for the Indian Economy

2020 ◽  
pp. 097265272092785
Author(s):  
Shesadri Banerjee ◽  
Jayanthi K. Anand ◽  
Shashanka Bhide
Keyword(s):  
Financial Market ◽  
Policy Evaluation ◽  
Global Financial Crisis ◽  
Emerging Market ◽  
Relevant Literature ◽  
New Keynesian ◽  
Market Segment ◽  
New Keynesian Model ◽  
Jel Codes ◽  
Keynesian Model

The widespread impacts of global financial crisis (2008-09) reinstate the need for better assessment of the macro-financial linkages for forecasting and policy evaluation. Our paper contributes to the relevant literature with evidence from the Indian financial sector. Following Castelnuovo (2013), a New Keynesian model with macro-financial linkages is estimated by the Bayesian technique for the sample period 2004: Q3 to 2019: Q1. We find that, in an Emerging Market Economy like India, business cycle leads financial cycle through the channel of expectations. Further, our results show that the linkages are heterogeneous in size depending on the financial market segment and market-specific shocks. JEL Codes: C11, E44, G10

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 What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices

2021 ◽  
Vol 111 (8) ◽  
pp. 2473-2505
Author(s):  
Thomas M. Mertens ◽  
John C. Williams
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Liquidity Trap ◽  
Keynesian Model ◽  
Two Equilibria

This paper analyzes the effects of the lower bound for interest rates on the distributions of inflation and interest rates. In a New Keynesian model with a lower bound, two equilibria emerge: policy is mostly unconstrained in the “target equilibrium,” whereas policy is mostly constrained in the “liquidity trap equilibrium.” Using options data on interest rates and inflation, we find forecast densities consistent with the target equilibrium and find no evidence in favor of the liquidity trap equilibrium. The lower bound has a sizable effect on the distribution of interest rates, but its impact on inflation is relatively modest. (JEL E12, E23, E31, E43, E52, G13)

Endogenous Technological Change and the New Keynesian Model

2020 ◽  
pp. 1-45
Author(s):  
Toshihiro Okada
Keyword(s):  
Lower Bound ◽  
Technological Change ◽  
Interest Rates ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Endogenous Technological Change ◽  
Keynesian Model ◽  
Supply Shock ◽  
News Shock ◽  
Endogenous Technology

This paper develops and estimates a new Keynesian (NK) model with endogenous technology. It shows that introducing endogenous technology can solve three important puzzles faced by conventional NK models: the “inflation persistence”, “disinflationary news shock”, and “zero lower bound (ZLB) supply shock” puzzles. First, the observed persistence in inflation is explained without relying on the conventional NK models' additional assumptions, e.g., backward price indexation. Second, it explains the observed disinflationary effect of a news shock. Third, the model avoids the conventional NK models' paradoxical, empirically inconsistent prediction that a negative supply shock is expansionary at the ZLB on interest rates.

scholarly journals Unconventional Fiscal Policy at the Zero Bound

2013 ◽  
Vol 103 (4) ◽  
pp. 1172-1211 ◽  
Author(s):  
Isabel Correia ◽  
Emmanuel Farhi ◽  
Juan Pablo Nicolini ◽  
Pedro Teles
Keyword(s):  
Interest Rates ◽  
Public Spending ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
Nominal Interest Rates ◽  
Low Interest Rates ◽  
Consistent Manner ◽  
Zero Bound ◽  
Future Commitments

When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates. (JEL E12, E43, E52, E62, H20)

scholarly journals Do Expectations Matter? The Great Moderation Revisited

2010 ◽  
Vol 2 (3) ◽  
pp. 183-205 ◽  
Author(s):  
Fabio Canova ◽  
Luca Gambetti
Keyword(s):  
Interest Rates ◽  
New Keynesian ◽  
Reduced Form ◽  
Bond Markets ◽  
New Keynesian Model ◽  
Great Moderation ◽  
Keynesian Model ◽  
Time Systems ◽  
Over Time

We examine the role of expectations in the Great Moderation episode. We derive theoretical restrictions in a New-Keynesian model and test them using measures of expectations obtained from survey data, the Greenbook and bond markets. Expectations explain the dynamics of inflation and interest rates but their importance is roughly unchanged over time. Systems with and without expectations display similar reduced form characteristics. Results are robust to changes in the structure of the empirical model. (JEL E23, E24, E31, E32)

NKV: A New Keynesian Model with Vulnerability

2020 ◽  
Vol 110 ◽  
pp. 470-476
Author(s):  
Tobias Adrian ◽  
Fernando Duarte ◽  
Nellie Liang ◽  
Pawel Zabczyk
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Risk Taking ◽  
New Keynesian ◽  
Output Gap ◽  
New Keynesian Model ◽  
Risk Return ◽  
Keynesian Model ◽  
Price Of Risk ◽  
The Impact

We present a New Keynesian model with endogenous risk. The conditional output gap volatility depends on the price of risk, giving rise to a vulnerability channel of monetary policy. Lower interest rates not only shift consumption intertemporally but also shift conditional output risk. The model fits estimates of the conditional output gap distribution 1 to 12 quarters ahead and suggests an intertemporal risk return trade-off for policymakers. Via the impact on risk taking, easy monetary policy lowers short-term downside risks to growth but increases medium-term risks. The framework can be used to jointly consider macroprudential and monetary policy.

Calibrating the Equilibrium Condition of a New Keynesian Model with Uncertainty

2017 ◽  
Vol 68 (2) ◽  
Author(s):  
Tobias Kranz
Keyword(s):  
Theoretical Analysis ◽  
Interest Rates ◽  
Impulse Response ◽  
Equilibrium Condition ◽  
Order Approximation ◽  
Higher Order ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Linear Dynamic ◽  
Keynesian Model

Abstract:This paper presents a theoretical analysis of the simulated impact of uncertainty in a New Keynesian model. In order to incorporate uncertainty, the basic three-equation framework is modified by higher-order approximation resulting in a non-linear (dynamic) IS curve. Using impulse response analyses to examine the behavior of the model after a cost shock, I find interest rates in the version with uncertainty to be lower in contrast to the case under certainty.

Sign in / Sign up

Export Citation Format

Share Document