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)

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 Should Inequality Factor into Central Banks' Decisions?

2020 ◽  
Vol 20 (196) ◽  
Author(s):  
Niels-Jakob Hansen ◽  
Alessandro Lin ◽  
Rui Mano
Keyword(s):  
Monetary Policy ◽  
Potential Role ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Taylor Rules ◽  
Keynesian Model

Inequality is increasingly a concern. Fiscal and structural policies are well-understood mitigators. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for monetary policy within a tractable Two-Agent New Keynesian model that captures important dimensions of inequality. We find some support for making inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules.

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 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)

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.

BAYESIAN ESTIMATION OF A SMALL-SCALE NEW KEYNESIAN MODEL WITH HETEROGENEOUS EXPECTATIONS

2020 ◽  
pp. 1-25
Author(s):  
Christopher J. Elias
Keyword(s):  
Adaptive Learning ◽  
New Keynesian ◽  
Small Scale ◽  
Model Parameters ◽  
New Keynesian Model ◽  
Great Moderation ◽  
Heterogeneous Expectations ◽  
Misspecified Models ◽  
Deep Model ◽  
Keynesian Model

This paper uses Bayesian methods to estimate a small-scale New Keynesian model with heterogeneous expectations (HE). Agents form expectations via Euler equation adaptive learning (AL) and differ by the model they use to forecast. Type A agents use a correctly specified model, while type B and type C agents use misspecified models. Quarterly US data from the pre-Great Moderation and Great Moderation periods are used to jointly estimate the degree of agent heterogeneity, the AL parameters, and the deep model parameters. Results show that the data exhibit significant expectational heterogeneity, and that the HE model fits the data better than a model with homogeneous agent AL.

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)

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