A New Keynesian Model with Wealth in the Utility Function
Creators
- 1. Brown University
- 2. University of California -- Berkeley
Description
This paper extends the textbook New Keynesian model by introducing wealth, in the form of government bonds, in households' utility function. This extension modifies the properties of the New Keynesian IS curve: the real interest rate is now negatively related to output instead of being constant, equal to the time discount rate. As a result, when price rigidity and marginal utility of wealth are sufficient, the equilibrium admits a unique steady state, and this steady state is always a source, whether the economy is at the zero lower bound or away from it. These properties greatly simplify the analysis of the zero lower bound, and they eliminate several zero-lower-bound pathologies, such as the forward-guidance puzzle.
Files
11.pdf
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