Risk and Monetary Policy in a New Keynesian Model

Mikhail Golosov, David Evans and Anmol Bhandari
Additional contact information
David Evans: University of Oregon
Anmol Bhandari: university of minnesota

No 1359, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Asset pricing data indicates that shocks to the nominal interest rates are primarily reflected in changes in risk premium. In this paper we build a New Keynesian model in which the behavior of interest rates and risk premium is consistent with this observation. We show that monetary shocks affect the real and nominal variables through the novel channel -- when nominal price adjustment is costly, firms need to balance needs to maximize current period profit and minimize future cost of price adjustments. Increase in risk, which follows a decrease in interest rates, increases firm's weight of future costs in inflationary environments, and leads to an increase in inflation, nominal and real marginal costs and output. Effectiveness of monetary policy varies with the state of the economy and generally is low in low inflationary environments. We also show that a number of well-known predictions of New Keynesian models reverses when interest rate shocks affect risk premium.

Date: 2017
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2017/paper_1359.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1359

Access Statistics for this paper

More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().