Some unpleasant properties of log-linearized solutions when the nominal rate is zero
AbstractDoes 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 InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2012-05.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-10 (All new papers)
- NEP-CBA-2012-04-10 (Central Banking)
- NEP-DGE-2012-04-10 (Dynamic General Equilibrium)
- NEP-MAC-2012-04-10 (Macroeconomics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Eggertsson/Woodford and Forward Guidance
by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2012-09-14 16:10:00
- To log-linearize or not to log-linearize?
by Economic Logician in Economic Logic on 2012-10-22 15:00:00
- Something I have Always Believed
by RB in The Lumpy Economist on 2012-10-24 01:22:48
- 10 Mid-Week PM Reads
by Barry Ritholtz in The Big Picture on 2012-10-24 20:30:21
- Krugman on Taylor
by David Andolfatto in MacroMania on 2013-03-19 19:12:00
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- Tom Holden & Michael Paetz, 2012. "Efficient Simulation of DSGE Models with Inequality Constraints," Quantitative Macroeconomics Working Papers 21207b, Hamburg University, Department of Economics.
- 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.
- Christopher Gust & David Lopez-Salido & Matthew E. Smith, 2012. "The empirical implications of the interest-rate lower bound," Finance and Economics Discussion Series 2012-83, Board of Governors of the Federal Reserve System (U.S.).
- William T. Gavin & Benjamin D. Keen, 2012.
"U.S. monetary policy: a view from macro theory,"
2012-019, Federal Reserve Bank of St. Louis.
- Roc Armenter, 2012. "On the timing of monetary policy reform," Working Papers 13-04, Federal Reserve Bank of Philadelphia.
- 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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