IDEAS home Printed from https://ideas.repec.org/p/apc/wpaper/205.html
   My bibliography  Save this paper

New Keynesian Economics through the Extensive Margin

Author

Listed:
  • Saki Bigio
  • Akira Ishide

Abstract

This paper reformulates the New Keynesian model to incorporate output adjustments through the extensive margin. Shifting from adjustments through the intensive to the extensive employment margin, the model introduces predetermined output, altering key properties of the New Keynesian framework. First, the Taylor principle is inverted: stability is achieved when nominal rates respond less than one-for-one with inflation. Second, the model significantly alters the output responses to changes in monetary policy. We argue that this represents a challenge and an opportunity for the literature. Sticky information allows the model to correct the sign of impulse responses.

Suggested Citation

  • Saki Bigio & Akira Ishide, 2025. "New Keynesian Economics through the Extensive Margin," Working Papers 205, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:205
    as

    Download full text from publisher

    File URL: https://perueconomics.org/wp-content/uploads/2025/01/WP-205.pdf
    File Function: Application/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Isabel Cairó & Shigeru Fujita & Camilo Morales-Jimenez, 2020. "The Cyclicality of Labor Force Participation Flows: The Role of Labor Supply Elasticities and Wage Rigidity," Working Papers 20-23, Federal Reserve Bank of Philadelphia.
    2. Gaur, Meghana & Grigsby, John & Hazell, Jonathon & Ndiaye, Abdoulaye, 2023. "Bonus Question: How Does Flexible Incentive Pay Affect Wage Rigidity?," CEPR Discussion Papers 18513, C.E.P.R. Discussion Papers.
    3. Aurelijus Dabusinskas & István Kónya & Stephen Millard, 2015. "How does labour market structure affect the response of economies to shocks?," CERS-IE WORKING PAPERS 1516, Institute of Economics, Centre for Economic and Regional Studies.
    4. Federico Di Pace & Matthias Hertweck, 2019. "Labor Market Frictions, Monetary Policy, and Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 274-304, April.
    5. Alexander Mihailov & Giovanni Razzu & Zhe Wang, 2019. "Heterogeneous effects of single monetary policy on unemployment rates in the largest EMU economies," Economics Discussion Papers em-dp2019-07, Department of Economics, University of Reading.
    6. Daniele Siena, 2014. "The European Monetary Union and Imbalances: Is it an Anticipation Story ?," Working papers 501, Banque de France.
    7. Carlsson, Mikael & Westermark, Andreas, 2011. "The New Keynesian Phillips Curve and staggered price and wage determination in a model with firm-specific labor," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 579-603, April.
    8. Koenig, Felix & Manning, Alan & Petrongolo, Barbara, 2014. "Reservation wages and the wage flexibility puzzle," LSE Research Online Documents on Economics 60613, London School of Economics and Political Science, LSE Library.
    9. Hibiki Ichiue & Takushi Kurozumi & Takeki Sunakawa, 2013. "Inflation Dynamics And Labor Market Specifications: A Bayesian Dynamic Stochastic General Equilibrium Approach For Japan'S Economy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 273-287, January.
    10. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Unemployment in an Estimated New Keynesian Model," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 329-360.
    11. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
    12. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546, Elsevier.
    13. Xiao-Li Gong & Jin-Yan Lu & Xiong Xiong & Wei Zhang, 2025. "Liquidity constraints, real estate regulation, and local government debt risks," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 11(1), pages 1-28, December.
    14. Lawrence Christiano & Mathias Trabandt & Karl Walentin, 2021. "Involuntary Unemployment and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 26-54, January.
    15. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks´ Macro Models," Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden).
    16. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 25-46, Fall.
    17. Muhammad Ali Nasir & Milton Yago & Alaa M. Soliman & Junjie Wu, 2016. "Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1136098-113, December.
    18. Nittai K. Bergman & David Matsa & Michael Weber & Michael Weber, 2022. "Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth," CESifo Working Paper Series 9512, CESifo.
    19. Michaillat, Pascal & Saez, Emmanuel, 2019. "Beveridgean Unemployment Gap," CEPR Discussion Papers 14132, C.E.P.R. Discussion Papers.
    20. Imen Ben Mohamed & Marine Salès, 2015. "Credit imperfections, labor market frictions and unemployment: a DSGE approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01082491, HAL.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:apc:wpaper:205. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nelson Ramírez-Rondán (email available below). General contact details of provider: https://edirc.repec.org/data/peruvea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.