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Optimal monetary and fiscal policy under discretion in the New Keynesian model: a technical appendix to "Great Expectations and the End of the Depression"

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Gauti B. Eggertsson

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Abstract

This paper details the microfoundations of the model presented in Staff Report no. 234, "Great Expectations and the End of the Depression." It defines the Markov perfect equilibrium formally in the nonlinear model, discusses in some detail the approximation method used and the order of accuracy of this approximation, and gives proofs of two propositions not proved in Staff Report no. 234. In addition, this paper states a proposition that shows the equivalence between the linear quadratic approximation in Staff Report no. 234 and a first order approximation to the exact nonlinear conditions of the government in the Markov perfect equilibrium defined here.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 235.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:235

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Keywords: Econometric models ; Equilibrium (Economics) ; Rational expectations (Economic theory) ; Price levels;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2002. "Expectation Traps and Monetary Policy," Macroeconomics 0201004, EconWPA. [Downloadable!]
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  2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  3. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2003-1), pages 139-235. [Downloadable!]
  4. Robert G. King & Alexander L. Wolman, 2003. "Monetary Discretion, Pricing Complementarity and Dynamic Multiple Equilibria," NBER Working Papers 9929, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Eggertsson, Gauti B., 2006. "The Deflation Bias and Committing to Being Irresponsible," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 283-321, March. [Downloadable!] (restricted)
  6. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October. [Downloadable!] (restricted)
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  7. Luis Cubbedu & Jose-Victor Rios-Rull, 2002. "Families as Shocks," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 1, Centro de Altisimos Estudios Rios Perez (CAERP). [Downloadable!]
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
  9. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December. [Downloadable!] (restricted)
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