IDEAS home Printed from https://ideas.repec.org/p/cdl/ucscec/qt4dq7f8td.html
   My bibliography  Save this paper

Resolving New Keynesian Anomalies with Wealth in the Utility Function

Author

Listed:
  • Michaillat, Pascal
  • Saez, Emmanuel

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

  • Michaillat, Pascal & Saez, Emmanuel, 2019. "Resolving New Keynesian Anomalies with Wealth in the Utility Function," Santa Cruz Department of Economics, Working Paper Series qt4dq7f8td, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt4dq7f8td
    as

    Download full text from publisher

    File URL: https://www.escholarship.org/uc/item/4dq7f8td.pdf;origin=repeccitec
    Download Restriction: no
    ---><---

    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:cdl:ucscec:qt4dq7f8td. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Lisa Schiff (email available below). General contact details of provider: https://edirc.repec.org/data/ecucsus.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.