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Policy Paradoxes in the New-Keynesian Model

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  • Michael Kiley

    (Federal Reserve Board)

Abstract

The common sticky-prices New-Keynesian model behaves differently in a zero-lower bound environment. Fiscal and forward guidance multipliers can be very large. Positive supply shocks, such as an increase in productivity, will lower production, and increased price flexibility can exacerbate such a decline in output (as well as amplifying the effects of other shocks). These results are fragile and disappear under a plausible alternative to sticky prices (sticky information): Fiscal and monetary multipliers are smaller, positive supply shocks raise output, and greater price flexibility, in the sense of more frequent updating of information, moves the economy's response toward the neoclassical benchmark. (Copyright: Elsevier)

Suggested Citation

  • Michael Kiley, 2016. "Policy Paradoxes in the New-Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 1-15, July.
  • Handle: RePEc:red:issued:14-286
    DOI: 10.1016/j.red.2016.03.002
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    More about this item

    Keywords

    New-Keynesian models of price adjustment; Zero-lower bound;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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