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Resolving New Keynesian Anomalies with Wealth in the Utility Function

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  • Pascal Michaillat
  • Emmanuel Saez

Abstract

At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels, and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source---which resolves all the anomalies.

Suggested Citation

  • Pascal Michaillat & Emmanuel Saez, 2019. "Resolving New Keynesian Anomalies with Wealth in the Utility Function," Papers 1905.13645, arXiv.org, revised Dec 2019.
  • Handle: RePEc:arx:papers:1905.13645
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    References listed on IDEAS

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    9. Emmanuel Saez & Pascal Michaillat, 2014. "An Economical Business-Cycle Model," 2014 Meeting Papers 105, Society for Economic Dynamics.
    10. Jean-Baptiste Michau & Yoshiyasu Ono & Matthias Schlegl, 2018. "Wealth Preference and Rational Bubbles," CESifo Working Paper Series 7148, CESifo.
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    13. Behzad Diba & Olivier Loisel, 2019. "Pegging the Interest Rate on Bank Reserves: A Resolution of New Keynesian Puzzles and Paradoxes," Working Papers gueconwpa~19-19-05, Georgetown University, Department of Economics.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A New Keynesian Model with Wealth in the Utility Function
      by Christian Zimmermann in NEP-DGE blog on 2018-10-20 20:40:08

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    Cited by:

    1. Campbell, Jeffrey R. & Ferroni, Filippo & Fisher, Jonas D.M. & Melosi, Leonardo, 2019. "The limits of forward guidance," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 118-134.
    2. , 2020. "Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism," Research Working Paper RWP 20-16, Federal Reserve Bank of Kansas City.
    3. Cantore, C. & Freund, L. B., 2020. "Workers, Capitalists, and the Government: Fiscal Policy and Income (Re)Distribution," Cambridge Working Papers in Economics 2095, Faculty of Economics, University of Cambridge.
    4. Ansgar Rannenberg, 2019. "Inequality, the risk of secular stagnation and the increase in household deb," Working Paper Research 375, National Bank of Belgium.
    5. Jean-Baptiste MICHAU, 2019. "The Preference for Net Wealth," Working Papers 2019-12, Center for Research in Economics and Statistics.
    6. Dennis Bonam, 2020. "A convenient truth: The convenience yield, low interest rates and implications for fiscal policy," DNB Working Papers 700, Netherlands Central Bank, Research Department.
    7. Pablo Cuba-Borda & Sanjay R. Singh, 2019. "Understanding Persistent Stagnation," International Finance Discussion Papers 1243, Board of Governors of the Federal Reserve System (U.S.).
    8. Emmanuel Saez & Pascal Michaillat, 2014. "An Economical Business-Cycle Model," 2014 Meeting Papers 105, Society for Economic Dynamics.
    9. Kragl, Jenny & Bental, Benjamin, 2020. "Other-Regarding Preferences and Incentives in the Societal Context," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224547, Verein für Socialpolitik / German Economic Association.
    10. Airaudo, Marco, 2020. "Temptation and forward-guidance," Journal of Economic Theory, Elsevier, vol. 186(C).
    11. Erik Eyster & Kristof Madarasz & Pascal Michaillat, 2019. "Pricing under Fairness Concerns," Papers 1904.05656, arXiv.org, revised Aug 2020.
    12. Sebastian Gechert & Jan Siebert, 2019. "Preferences over wealth," IMK Working Paper 200-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    13. Kim, Minseong, 2019. "A comment on ergodicity economics," OSF Preprints 7gm8a, Center for Open Science.
    14. Christian Bredemeier & Christoph Kaufmann & Andreas Schabert, 2017. "Interest Rate Spreads and Forward Guidance," Working Paper Series in Economics 96, University of Cologne, Department of Economics.
    15. Jean-Baptiste Michau & Yoshiyasu Ono & Matthias Schlegl, 2018. "Wealth Preference and Rational Bubbles," CESifo Working Paper Series 7148, CESifo.
    16. Behzad Diba & Olivier Loisel, 2019. "Pegging the Interest Rate on Bank Reserves: A Resolution of New Keynesian Puzzles and Paradoxes," Working Papers gueconwpa~19-19-05, Georgetown University, Department of Economics.
    17. Jean-Baptiste Michau & Yoshiyasu Ono & Matthias Schlegl, 2018. "Wealth Preference and Rational Bubbles," CESifo Working Paper Series 7148, CESifo.
    18. Ansgar Rannenberg, 2019. "Forward guidance with preferences over safe assets," Working Paper Research 364, National Bank of Belgium.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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