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A New Keynesian Model with Endogenous Frictions

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  • Giese, Guido
  • Wagner, Helmut

Abstract

We develop a New Keynesian model that incorporates rigidities in the ability of households and firms to adjust their utility-efficient / profit-efficient resource allocation in response to shocks. These rigidities reflect the fact that households and firms enter into commitments for several periods of time regarding the allocation of resources limiting their ability to flexibly respond to unforeseen shocks. We show that these rigidities can adversely impact the productivity of firms and households' utility and result in the appearance of higher statistical moments in the demand and supply curves which are not exogenously constant but system-endogenous. As a result, we will derive the appearance of an inflation bias which exists even in the case of an efficient natural output and which cannot be removed by a rule-based monetary policy. Further, we show that monetary policy faces an additional trade-off in managing the friction losses due to inflation uncertainty and output uncertainty.

Suggested Citation

  • Giese, Guido & Wagner, Helmut, 2009. "A New Keynesian Model with Endogenous Frictions," Discussion Paper Series a520, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:a520
    Note: April 2009
    as

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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/17495/DP520.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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