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Monetary Policy Puzzle and wealth targeting consumers

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  • Elliot Aurissergues

    () (PSE - Paris School of Economics)

Abstract

In this paper, I document that the three equation new keynesian model predicts a strong overreaction of real wages to monetary policy shocks, whereas the response is close to zero in datas. This puzzle may be solved by sticky wages but I show that this overreaction is created by the intertemporal choice of households, on which the recent forward guidance literature have cast doubts. Then, I build a simple new keynesian model with bounded rationality. At each period, households do not form a consistent plan for their lifetime but choose between leisure, consumption and future wealth. It transposes joy of giving model to the business cycles analysis. I show that this simple model generates more realistic response to monetary policy shocks than the three equation new keynesian model. The model also highlights the importance of perceived future wealth and asset supply. Their response to changes in real inetrest rates deeply affects consumption and leisure decision. This point could be useful for more complicated model like Heterogenous agents or Behavioral new keynesian model. JEL Classification: D83,D84

Suggested Citation

  • Elliot Aurissergues, 2017. "Monetary Policy Puzzle and wealth targeting consumers," Working Papers halshs-01625347, HAL.
  • Handle: RePEc:hal:wpaper:halshs-01625347
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01625347
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    File URL: https://halshs.archives-ouvertes.fr/halshs-01625347/document
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    References listed on IDEAS

    as
    1. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
    2. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-1262, December.
    3. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    4. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    6. Alisdair McKay & Emi Nakamura & Jón Steinsson, 2016. "The Power of Forward Guidance Revisited," American Economic Review, American Economic Association, vol. 106(10), pages 3133-3158, October.
    7. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
    8. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    9. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2007. "Euler equations and money market interest rates: A challenge for monetary policy models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1863-1881, October.
    10. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-279, July.
    11. Barakchian, S. Mahdi & Crowe, Christopher, 2013. "Monetary policy matters: Evidence from new shocks data," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 950-966.
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    More about this item

    Keywords

    Forward guidance; nonseparable preferences; bounded ratio- nality; euler equation; monetary policy shocks;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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