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The nature of monetary policy in New Keynesian models and the role of high-powered money

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  • Kim, Minseong

Abstract

We show that the first-order optimality conditions in the baseline New Keynesian model relating to central bank reserves become invalid due to a corner solution, with future budget constraints plus rational expectation requiring zero central bank reserves today even for a disequilibrium. The use of a multiple-agent variant does not resolve the issue. The corrected understanding of the baseline New Keynesian model supports the MMT view that despite endogenous money, HPM can be crucial for efficacy of monetary and government policies. We leave the question of whether a fully Post-Keynesian analysis invalidates such a conclusion to future works.

Suggested Citation

  • Kim, Minseong, 2024. "The nature of monetary policy in New Keynesian models and the role of high-powered money," OSF Preprints dzjsc, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:dzjsc
    DOI: 10.31219/osf.io/dzjsc
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    References listed on IDEAS

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