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Resolving New Keynesian Anomalies with Wealth in the Utility Function

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  • Michaillat, Pascal
  • Saez, Emmanuel

Abstract

The New Keynesian model makes several anomalous predictions at the zero lower bound: collapse of output and inflation, and implausibly large effects of forward guidance and government spending. 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 social status. Since people save not only for future consumption but also 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 equilibrium at the zero lower bound becomes a source instead of a saddle-which resolves all the anomalies.

Suggested Citation

  • Michaillat, Pascal & Saez, Emmanuel, 2019. "Resolving New Keynesian Anomalies with Wealth in the Utility Function," CEPR Discussion Papers 13775, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13775
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    References listed on IDEAS

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    11. 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

    Citations

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    Cited by:

    1. Ansgar Rannenberg, 2019. "Inequality, the risk of secular stagnation and the increase in household deb," Working Paper Research 375, National Bank of Belgium.
    2. 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.).
    3. Erik Eyster & Kristof Madarasz & Pascal Michaillat, 2019. "Pricing under Fairness Concerns," Papers 1904.05656, arXiv.org, revised Aug 2020.
    4. 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.
    5. Michaillat, Pascal & Saez, Emmanuel, 2014. "An economical business-cycle model," LSE Research Online Documents on Economics 86332, London School of Economics and Political Science, LSE Library.
    6. 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.
    7. Jean-Baptiste Michau & Yoshiyasu Ono & Matthias Schlegl, 2018. "Wealth Preference and Rational Bubbles," CESifo Working Paper Series 7148, CESifo.
    8. Jean-Baptiste Michau & Yoshiyasu Ono & Matthias Schlegl, 2018. "Wealth Preference and Rational Bubbles," CESifo Working Paper Series 7148, CESifo.
    9. 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.
    10. , 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.
    11. 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.
    12. Jean-Baptiste MICHAU, 2019. "The Preference for Net Wealth," Working Papers 2019-12, Center for Research in Economics and Statistics.
    13. Sebastian Gechert & Jan Siebert, 2019. "Preferences over wealth," IMK Working Paper 200-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    14. Ansgar Rannenberg, 2019. "Forward guidance with preferences over safe assets," Working Paper Research 364, National Bank of Belgium.
    15. 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.
    16. Airaudo, Marco, 2020. "Temptation and forward-guidance," Journal of Economic Theory, Elsevier, vol. 186(C).
    17. Kim, Minseong, 2019. "A comment on ergodicity economics," OSF Preprints 7gm8a, Center for Open Science.
    18. 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.

    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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