Resolving New Keynesian Anomalies with Wealth in the Utility Function

Pascal Michaillat and Emmanuel Saez

The Review of Economics and Statistics, 2021, vol. 103, issue 2, 197-215

Abstract: At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source, which resolves all the anomalies.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
https://doi.org/10.1162/rest_a_00893

Related works:
Working Paper: Resolving New Keynesian Anomalies with Wealth in the Utility Function (2019)
Working Paper: Resolving New Keynesian Anomalies with Wealth in the Utility Function (2019)
Working Paper: Resolving New Keynesian Anomalies with Wealth in the Utility Function (2018)
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:tpr:restat:v:103:y:2021:i:2:p:197-215

Ordering information: This journal article can be ordered from
https://mitpressjour ... rnal/?issn=0034-6535

Access Statistics for this article

The Review of Economics and Statistics is currently edited by Pierre Azoulay, Olivier Coibion, Will Dobbie, Raymond Fisman, Benjamin R. Handel, Brian A. Jacob, Kareen Rozen, Xiaoxia Shi, Tavneet Suri and Yi Xu

More articles in The Review of Economics and Statistics from MIT Press
Bibliographic data for series maintained by The MIT Press ().