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New Keynesian Dynamics in a Low Interest Rate Environment

Author

Listed:
  • R. Anton Braun

    (University of Tokyo (E-mail: R.Anton.Braun@gmail.com))

  • Lena Mareen Korber

    (German Institute for Economic Research (E-mail: Lenakoerber@gmail.com))

Abstract

Recent research has found that the dynamics of the New Keynesian model are very different when the nominal interest rate is zero. Improvements in technology shocks and reductions in the labor tax rate lower economic activity and the size of the government purchase multiplier can be as large as four. We consider the empirical relevance of these dynamics using Japanese data. Japan is interesting because it experienced a protracted period of zero nominal interest rates. A prototypical New Keynesian model calibrated to Japan and solved using nonlinear methods exhibits orthodox dynamics with a government purchase multiplier that is less than one.

Suggested Citation

  • R. Anton Braun & Lena Mareen Korber, 2010. "New Keynesian Dynamics in a Low Interest Rate Environment," IMES Discussion Paper Series 10-E-05, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:10-e-05
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    References listed on IDEAS

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    Cited by:

    1. Leith, Campbell & Liu, Ding, 2016. "The inflation bias under Calvo and Rotemberg pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 283-297.
    2. Andrew Binning & Junior Maih, 2016. "Forecast uncertainty in the neighborhood of the effective lower bound: How much asymmetry should we expect?," Working Paper 2016/13, Norges Bank.
    3. Andrew Binning & Junior Maih, 2016. "Implementing the zero lower bound in an estimated regime-switching DSGE model," Working Paper 2016/3, Norges Bank.
    4. Lilia Maliar & Serguei Maliar & John B. Taylor & Inna Tsener, 2015. "A Tractable Framework for Analyzing a Class of Nonstationary Markov Models," Economics Working Papers 15105, Hoover Institution, Stanford University.
    5. repec:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9474-8 is not listed on IDEAS
    6. Braun, R. Anton & Körber, Lena Mareen, 2011. "New Keynesian dynamics in a low interest rate environment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2213-2227.
    7. Tobias Cwik, 2012. "Fiscal consolidation using the example of Germany," Finance and Economics Discussion Series 2012-80, Board of Governors of the Federal Reserve System (U.S.).
    8. William Gavin & Benjamin Keen, 2013. "U.S. Monetary Policy: A View from Macro Theory," Open Economies Review, Springer, vol. 24(1), pages 33-49, February.
    9. Tom Holden & Michael Paetz, 2012. "Efficient Simulation of DSGE Models with Inequality Constraints," Quantitative Macroeconomics Working Papers 21207b, Hamburg University, Department of Economics.
    10. Funke, Michael & Paetz, Michael, 2012. "Financial system reforms and China's monetary policy framework : A DSGE-based assessment of initiatives and proposals," BOFIT Discussion Papers 30/2012, Bank of Finland, Institute for Economies in Transition.
    11. Carlstrom, Charles T. & Fuerst, Timothy S. & Paustian, Matthias, 2015. "Inflation and output in New Keynesian models with a transient interest rate peg," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 230-243.
    12. Martin Slanicay & Jan Čapek & Miroslav Hloušek, 2016. "Some Notes On Problematic Issues In Dsge Models," Economic Annals, Faculty of Economics, University of Belgrade, vol. 61(210), pages 79-100, July - Se.
    13. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander W. & Throckmorton, Nathaniel A., 2015. "The zero lower bound, the dual mandate, and unconventional dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 14-38.
    14. Rod Tyers & Jenny Corbett, 2012. "Japan's economic slowdown and its global implications: a review of the economic modelling," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 26(2), pages 1-28, November.
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    16. Ippei Fujiwara, 2010. "Export shocks and the zero bound trap," Globalization and Monetary Policy Institute Working Paper 63, Federal Reserve Bank of Dallas.
    17. Chen, Han, 2014. "Assessing the Effects of the Zero-Interest-Rate Policy through the Lens of a Regime-Switching DSGE Model," Finance and Economics Discussion Series 2014-38, Board of Governors of the Federal Reserve System (U.S.).
    18. Andrew Binning & Junior Maih, 2017. "Modelling Occasionally Binding Constraints Using Regime-Switching," Working Papers No 9/2017, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    19. Kent Matthews, 2013. "No Plan B: But is There a ‘Third Way'?," Economic Affairs, Wiley Blackwell, vol. 33(2), pages 220-231, June.
    20. Nao Sudo, 2011. "Accounting for the Decline in the Velocity of Money in the Japanese Economy," IMES Discussion Paper Series 11-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
    21. Serguei Maliar & John Taylor & Lilia Maliar, 2016. "The Impact of Alternative Transitions to Normalized Monetary Policy," 2016 Meeting Papers 794, Society for Economic Dynamics.
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    More about this item

    Keywords

    Government purchases; zero nominal interest rates; monetary policy;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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