Resolving New Keynesian Anomalies with Wealth in the Utility Function

Pascal Michaillat and Emmanuel Saez

No 13775, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The New Keynesian model makes several anomalous predictions at the zero lower bound: collapse of output and inflation, and implausibly large effects of forward guidance and government spending. 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 social status. Since people save not only for future consumption but also 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 equilibrium at the zero lower bound becomes a source instead of a saddle—which resolves all the anomalies.

JEL-codes: E32 E52 E62 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
https://cepr.org/publications/DP13775 (application/pdf)

Related works:
Journal Article: Resolving New Keynesian Anomalies with Wealth in the Utility Function (2021)
Working Paper: Resolving New Keynesian Anomalies with Wealth in the Utility Function (2021)
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:cpr:ceprdp:13775

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13775

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().