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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. 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.
    2. Jean-Baptiste Michau & Yoshiyasu Ono & Matthias Schlegl, 2018. "Wealth Preference and Rational Bubbles," ISER Discussion Paper 1035, Institute of Social and Economic Research, Osaka University.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy


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