A New Keynesian Model with Wealth in the Utility Function (joint with Emmanuel Saez)
The New Keynesian model suffers from several anomalies at the zero lower bound: explosive output and inflation, forward-guidance puzzle, and explosive government-spending multiplier. To resolve these anomalies, we introduce relative wealth into households’ utility function; the justification is that relative wealth is a marker of social status, and people value high 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.

Please sign up for meetings below:
Date: 7 May 2019, 16:30 (Tuesday, 2nd week, Trinity 2019)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room G
Speaker: Pascal Michaillat (Brown University)
Organising department: Department of Economics
Part of: Seminar in Macroeconomics
Booking required?: Not required
Audience: Members of the University only
Editor: Melis Boya