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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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)
You can help add them by filling out this form.
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
- S. Boragan Aruoba & Frank Schorfheide, 2013.
"Macroeconomic dynamics near the ZLB: a tale of two equilibria,"
13-29, Federal Reserve Bank of Philadelphia.
- S. Borağan Aruoba & Frank Schorfheide, 2013. "Macroeconomic Dynamics Near the ZLB: A Tale of Two Equilibria," NBER Working Papers 19248, National Bureau of Economic Research, Inc.
- Hall, Jamie, 2012. "Consumption dynamics in general equilibrium," MPRA Paper 43933, University Library of Munich, Germany.
- 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.).
- Yasuo Hirose & Atsushi Inoue, 2013.
"Zero Lower Bound and Parameter Bias in an Estimated DSGE Model,"
Tohoku Economics Research Group
308, Graduate School of Economics and Management, Faculty of Economics, Tohoku University.
- Yasuo Hirose & Atsushi Inoue, 2013. "Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," CAMA Working Papers 2013-60, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Yasuo Hirose & Atsushi Inoue, 2013. "Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," Departmental Working Papers 1306, Southern Methodist University, Department of Economics.
- William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013.
"Global Dynamics at the Zero Lower Bound,"
Auburn Economics Working Paper Series
auwp2013-17, Department of Economics, Auburn University.
- William T. Gavin & Benjamin D. Keen, 2012.
"U.S. monetary policy: a view from macro theory,"
2012-019, Federal Reserve Bank of St. Louis.
- 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.
- Tom Holden & Michael Paetz, 2012. "Efficient Simulation of DSGE Models with Inequality Constraints," Quantitative Macroeconomics Working Papers 21207b, Hamburg University, Department of Economics.
- Roc Armenter, 2012. "On the timing of monetary policy reform," Working Papers 13-04, Federal Reserve Bank of Philadelphia.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.