10.5281/zenodo.1400168
https://zenodo.org/records/1400168
oai:zenodo.org:1400168
Michaillat, Pascal
Pascal
Michaillat
0000-0003-2381-7470
Brown University
Saez, Emmanuel
Emmanuel
Saez
University of California -- Berkeley
A New Keynesian Model with Wealth in the Utility Function
Zenodo
2018
2018-08-20
Working paper
10.1162/rest_a_00893
10.5281/zenodo.1186338
https://zenodo.org/communities/economics
Creative Commons Attribution 4.0 International
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.