Work

Resolving New Keynesian Anomalies with Wealth in the Utility Function

Year: 2018

Type: article

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 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.

Source: The Review of Economics and Statistics

DOI: 10.1162/rest_a_00893

Authors: Pascal Michaillat, Emmanuel Saez

Institutions: Brown University, University of California, Berkeley

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Funder: Washington Center for Equitable Growth

OpenAlex ID: W2947678014