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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:
docs.google.com/spreadsheets/d/15qI0Ad4ZT1UoZmxvXuGqX_5Dy2f1cELTd0gxynVSX-s/edit#gid=0
Date:
7 May 2019, 16:30
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:
Macroeconomics Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Melis Clark
