Published August 20, 2018
| Version v2
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A New Keynesian Model with Wealth in the Utility Function
Creators
- 1. Brown University
- 2. University of California -- Berkeley
Description
This paper extends the New Keynesian model by introducing wealth, in the form of government bonds, into the utility function. The extension modifies the Euler equation: in steady state the real interest rate is negatively related to consumption instead of being constant, equal to the time discount rate. Thus, when the marginal utility of wealth is large enough, the dynamical system representing the equilibrium is a source not only in normal times but also at the zero lower bound. This property eliminates the zero-lower-bound anomalies of the New Keynesian model, such as explosive output and inflation, and forward-guidance puzzle.
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Related works
- Is previous version of
- Journal article: 10.1162/rest_a_00893 (DOI)