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A New Keynesian Model with Wealth in the Utility Function


  • Pascal Michaillat

    (Brown University)

  • Emmanuel Saez

    (University of California, Berkeley)


This paper extends the textbook New Keynesian model by introducing wealth, in the form of government bonds, in households' utility function. As bonds are in zero net supply, the IS curve imposes that output is decreasing in the real interest rate---as in the old IS-LM model. In contrast, the textbook model's IS curve imposes that the real rate is constant, equal to the time discount factor. As a result, when price rigidity and marginal utility of wealth are sufficient, our extended model's equilibrium has a unique steady state and is globally determinate, whether monetary policy is active, passive, or an interest-rate peg. This property greatly simplifies the analysis of the zero lower bound. Furthermore several pathologies of the textbook model at the zero lower bound---such as the forward-guidance puzzle---disappear.

Suggested Citation

  • Pascal Michaillat & Emmanuel Saez, 2018. "A New Keynesian Model with Wealth in the Utility Function," 2018 Meeting Papers 1276, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:1276

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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. 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.
    3. Christoffel, Kai & Mazelis, Falk & Montes-Galdón, Carlos & Müller, Tobias, 2020. "Disciplining expectations and the forward guidance puzzle," Working Paper Series 2424, European Central Bank.
    4. 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.
    5. Sebastian Gechert & Jan Siebert, 2019. "Preferences over wealth," IMK Working Paper 200-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Glover, Andrew, 2019. "Aggregate effects of minimum wage regulation at the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 114-128.
    7. Ansgar Rannenberg, 2019. "Forward guidance with preferences over safe assets," Working Paper Research 364, National Bank of Belgium.
    8. 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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