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Some unpleasant properties of log-linearized solutions when the nominal rate is zero

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  • R. Anton Braun
  • Lena Mareen Körber
  • Yuichiro Waki

Abstract

Does fiscal policy have qualitatively different effects on the economy in a liquidity trap? We analyze a nonlinear stochastic New Keynesian model and compare the true and loglinearized equilibria. Using the loglinearized equilibrium conditions, the answer to the above question is yes. However, for the true nonlinear model, the answer is no. For a broad range of empirically relevant parameterizations, labor falls in response to a tax cut in the loglinearized economy but rises in the true economy. While the government purchase multiplier is above two in the loglinearized economy it is about one in the true economy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2012-05.

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Date of creation: 2012
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Handle: RePEc:fip:fedawp:2012-05

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Eggertsson/Woodford and Forward Guidance
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2012-09-14 16:10:00
  2. To log-linearize or not to log-linearize?
    by Economic Logician in Economic Logic on 2012-10-22 15:00:00
  3. Something I have Always Believed
    by RB in The Lumpy Economist on 2012-10-24 01:22:48
  4. 10 Mid-Week PM Reads
    by Barry Ritholtz in The Big Picture on 2012-10-24 20:30:21
  5. Krugman on Taylor
    by David Andolfatto in MacroMania on 2013-03-19 19:12:00
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Cited by:
  1. Tom Holden & Michael Paetz, 2012. "Efficient simulation of DSGE models with inequality constraints," School of Economics Discussion Papers 1612, School of Economics, University of Surrey.
  2. Gust, Christopher & López-Salido, J David & Smith, Matthew E, 2012. "The Empirical Implications of the Interest-Rate Lower Bound," CEPR Discussion Papers 9214, C.E.P.R. Discussion Papers.
  3. William T. Gavin & Benjamin D. Keen, 2012. "U.S. monetary policy: a view from macro theory," Working Papers 2012-019, Federal Reserve Bank of St. Louis.
  4. Roc Armenter, 2012. "On the timing of monetary policy reform," Working Papers 13-04, Federal Reserve Bank of Philadelphia.
  5. William T. Gavin & Benjamin D. Keen & Alexander Richter & Nathaniel Throckmorton, 2013. "Global dynamics at the zero lower bound," Working Papers 2013-007, Federal Reserve Bank of St. Louis.

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