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A New Keynesian Model with Wealth in the Utility Function

Pascal Michaillat and Emmanuel Saez ()

No 1276, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:1276

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More papers in 2018 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.
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