Questions tagged [new-keynesian-economics]

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What are the major flaws of the RBC model and how does the New Keynesian model address them?

Looking for a generic answer to this question and potentially literature etc. that will help me study this question. Thanks in advance.
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42 views

Solving Rational Expectation Models Linear vs. Nonlinear

Since I am coding some linear New Keynesian models in python and solving them under rational expectations (using the method of undetermined coefficients/linear time iteration), I was wondering whether ...
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0answers
23 views

Why do investment adjustment and capital adjustment costs yield different dynamics?

Both the Business Cycle and DSGE literature find that Investment adjustment costs and capital adjustment costs give rise to different dynamics for investment, output, consumption etc. Investment ...
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1answer
54 views

Deriving optimality conditions in the New Keynesian model framework with an undefined consumption function

I am trying to solve the household's optimization problem in the New Keynesian model framework, where utility is given by $$ E_0\sum_{t=0}^\infty \beta^t \mathcal{U}(C_t,L_t,N_t;Z_t) $$ and period ...
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0answers
40 views

Deriving the New Keynesian Phillips Curve (NKPC)

I have a question regarding the NKPC. I would like to know if it is possible to derive the NKPC from a sticky prices model, without making assumptions regarding the production function firms face. I ...
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0answers
40 views

Elasticity of substitution of goods in canonical New Keynesian Model

In the context of a New Keynesian Model (NKM) with imperfect competition, the aggregate demand for good can be represented using Dixit-Stiglitz aggregator $$C_t=\Bigg(\sum^1_0C_t(i)^{\varepsilon-1\...
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42 views

Inflation in Equilibrium

Suppose we have the following market-clearing condition for the goods market within a New-Keynesian setting: $$ c_t = (1-\alpha)(1-\frac{\phi}{2}\pi_t^2)y_t + \alpha (1-\frac{\phi}{2}\pi_{t-1}^2)y_{t-...
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26 views

Derive optimal wage in New Keynesian-Calvo wage stickiness

Following Costa, 2016 in page 96, developing the labor variety optimal wage decided by the household, the FOC is: $$0=E_t\sum_{i=0}^\infty(\beta\theta_w)^{t+i}\left\{\psi_W\left[L_{t+i}\left(\frac{W_{...
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16 views

Increase in money supply when price are flexible in the basic new keynesian model

I would like to know what would be the effect on price and quantities of an increase in money supply in the basic new keyensian model. What happen if price are fully flexible ? What if prices are ...
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0answers
38 views

Hybrid Phillips curve under two-state Markov process

I am studying a New Keynesian model with a hybrid Phillips curve which reads \begin{align*} \pi_t=\beta E_t \pi_{t+1} + \varpi \pi_{t-1}+ \kappa x_t. \end{align*} The demand shock in the IS curve ...
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2answers
81 views

Basic New Keynesian model with flexible price

I would like to know what would be the response of variables in the Basic New Keynesian model but with flexible prices (ie not with Calvo pricing). For example I have troubles to see how having ...
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1answer
55 views

Jordi Gali Book First Edition Page 47 (need help for derivation)

The below image is from P.47 of Monetary Policy, Inflation, and the Business Cycle by Jordi Gali. My question is "how can we derive the equation (15). If (15) is a correct equation, my guess is ...
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17 views

About marginal cost setting on Jordi Gali's work

I'm studying Gali's work with the paper(or book?) which is "Jordi Gali, Monetary policy inflation and the business cycle_An introduction to the new keynesian framework(2015)" and wonder one ...
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1answer
31 views

New Keynesian IS curve: question about time dependence

A simple version of the new-Keynesian IS cuve is given as follows: $$ \ln Y_{t} =\ln Y_{t+1} -\frac{1}{\theta} r_t. $$ Here $r_t$ is the real interest rate and $1/\theta$ is the cross elasticity of ...
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0answers
11 views

Unemployment with Insiders-Outsiders. What is a core employee?

In Dynamic Macroeconomics book, by Alogoskoufis, on chapter 17, he analyses a model of aggregate fluctuations that is based on periodic nominal wage contracts and can explain involuntary unemployment (...
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1answer
118 views

The new Keynesian IS curve: What determines output?

The New Keynesian IS curve can be described by the following (log-linearisation around the steady-state):$$y_t=E_t(y_{t+1})- \frac{1}{\theta}(i_t - E_t\pi_{t+1}-\rho)$$ where $\displaystyle\frac{1}{\...
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0answers
33 views

Derivation question: Gali (2015), chapter 5, equation 25

I am wondering how Gali derived equation (25) in chapter 5 of his book Monetary Policy, Inflation, and the Business Cycle (2015). We have equation (21): $$ \vartheta \hat{x}_{t} = -\kappa \hat{p}_{t} +...
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24 views

New Keynesian Phillips curve with time-varying elasticity of demand

I am looking for a paper or notes which derive the New Keynesian Phillips curve with Calvo price staggering and time-varying elasticity of demand (i.e. markup shocks). Specifically, I am trying to ...
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1answer
26 views

Keynesian model functions

In The Keynesian economy, I have the following model Here, the production function $F(N,K) = Y/K = A(N/K)^{1.10}$ and by the labor demand function $F_N(K,N)= N/K= b_0(w/p)^{b_1}$. right? That is, ...
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1answer
77 views

Intuition for effect of interest rate changes in New Keynesian model

I am trying to understand the intuition behind the effect of an interest rate change in a simple New Keynesian model (or really in any sticky price model). As a simple example, I take (roughly) the ...
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1answer
42 views

How were unit labor costs estimated by Gali and Gertler (1999)?

I am trying to estimate a NKPC like the one Gali & Gerter, 1999 and Gali &Gerter, 2001 estimated. I am having trouble with understangind how they calculated the marginal cost, i.e., which time ...
2
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1answer
62 views

Why is Keynes attacking the (neo)classical theory of interest rates on the grounds that it is indeterminate?

I do understand that he argues that in order to draw the loanable funds supply curve, you have to already know the volume of income, i.e. production, and therefore the interest rate in advance. But ...
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1answer
73 views

loanable funds theory: why is the supply of loanable funds equal to saving (+ dishoarding + new money)?

It seems that the loanable funds theory suggests that all that is saved is supplied in the market for loanable funds. This makes sense when we are talking about 'household saving' (i.e. household ...
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0answers
48 views

Calvo Price setting in a Multi-sector NK Model

In Calstrom-Fuerst-Ghironi (2004) "Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?", they used a standard two-sector NK model, and the optimal price ...
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1answer
66 views

Why Keynesians prefer short run measures despite straight long-run Phillips curve?

I was studying about the Monetarists' and Keynesians' view of the Phillips curve and natural rate theory of Friedman. It seems intuitive to me as to why Friedman argues that using an expansionary ...
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1answer
55 views

Max of a profit function: partial derivative of an integral function?

I am struggling with the maximization of the following profit function in a New-Keynesian model. Here there is the FOC. $$\frac{\delta}{\delta Y_t(i)} P_tY_t- \int_0^1 P_t(i)Y_t(i)di = \frac{\delta}{\...
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0answers
7 views

What would it mean for a parameter region to be E-stable but undeterminate?

What would it mean for a parameter region for a dynamic system to be E-stable, but indeterminate? E-stable: it's stable under learning... so this means, once in equilibrium, you stay there? Or does it ...
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84 views

Log- Linearization of equations

can somebody help me understand how it is possible to log-linearize this equation? $$\frac{1}{1+i_{t}}=\beta E^i_{t}\left[\frac{P_{t}}{P_{t+1}} \cdot \frac{U_{c}\left(C_{t+1}^{i}, \xi_{t+1}\right)}{U_{...
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24 views

Stabilizing Property of a Taylor Rule

Considering the New Keynesian Model we have the Phillips curve and dynamic IS curve in log-linearized form with price shock $u^{\pi}$ and demand shock $u^{IS}$ :$$\pi_t=\beta E_t\pi_{t+1}+\kappa(y_t-...
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26 views

Successes and limitations of New Keynesian DSGE models?

What are some good review papers that discuss the successes and limitations of current state of the art (New Keynesian) DSGE models assuming rational expectations? Probably some of these reviews can ...
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21 views

New Keynesian Model Output Gap and Calibration

I am trying to solve following problem regarding the New Keynesian Model: So, I have calculated following equations by using the Taylor Rule, Phillips Curve and IS Curve: $$\pi=\frac{\kappa\phi_y}{(1-...
2
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1answer
303 views

Log linearising EUler equation

I am trying to solve a problem that asks to log linearise following Euler equation of the New Keynesian model: $$C^{-\sigma}_t=\beta E_tC^{-\sigma}_{t+1}(1+i_t)/(1+\pi_{t+1}).$$ The solution is ...
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0answers
58 views

Elasticity of substitution in leisure

This might be a very basic question, but I am a beginner in macro models. I would appreciate help with my doubt. In different papers I have read about the elasticity of labor supply or the inverse of ...
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1answer
148 views

Log-linear version of the uncovered interest rate parity

I am trying to derive the log-linear version of the uncovered interest rate parity under complete asset markets. I know that the UIP condition is given by $$(1+i_t)=(1+i^*_t)\frac{S_{t+1}}{S_t}$$ I ...
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0answers
36 views

Non-traded goods in Two Country New Keynesian Model

I am working on a two-country New Keynesian model, where I include traded and non-traded goods. The final good is produced using traded and non-traded inputs: $$ Z_t=\bigg[a^\frac{1}{\kappa}Z_{T,t}^{\...
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3answers
118 views

Do Keyensians believe that it's wrong for households to aggresively save money?

Many Austrian/Neoclassical websites argue that Keynes and Keynesians demonise saving and encourage individual people to spend rather than save. Someone (not an economist) recently told me that I need ...
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1answer
40 views

Can you set $C / P^{\eta}$ to be the numeraire in a NK model?

Consider a static model with CES demand. Real aggregate demand is $$ C = \left(\sum_j c_j^{(\eta-1)/\eta}\right)^{\eta/(\eta-1)} $$ and labor supply is inelastic, so the budget constraint is $ \sum_j ...
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47 views

log linearization around steady state (price dynamics)

I'm stuck with a derivation from Gali's book. In the version 2008, I can't get eq. (7) from chapter 3. All is ok until the following: $$ (1-\epsilon)\log\pi_{t}=\log(\theta+(1-\theta)\exp[(1-\...
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1answer
107 views

Pareto efficiency (optimality conditions) in simple New Keynesian model

I am looking for the pareto-optimal equilibrium for a central planner's problem in a simple New Keynesian model. The planner's problem is to choose $\{ C_{t}, H_{t}, Y_{t}, \pi_{t}, \{h_{t}(j)_{j=0}^{\...
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1answer
112 views

How to interpret the difference between natural level and steady state in Macroeconomic theory

I am reading Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications by Gali. In this question I am going to use the output $Y_t$ as an ...
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1answer
133 views

Why consumption is defined as $ C_t:= \left(\int^1_0C_t(i)^{\frac{\epsilon-1}{\epsilon}}di\right)^{\frac{\epsilon}{\epsilon-1}} $

I am reading Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications by Gali. In section 3.1 he presents/defines the consumption as $$ ...
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146 views

FOC and Log Linerizations

I was wondering whether anyone might be able to help me or at least push me in the right direction with this New Keynesian Model. I apparently have that the household function is as follows: ...
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0answers
227 views

How is there full employment level at equilibrium level according to Keynesian theory(AD-AS approach)?

According to Keynesian theory :- Equilibrium level is the point at which Aggregate Demand curve intersects Aggregate Supply curve . And this point is termed as Full Employment Level How do we ...
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0answers
40 views

Adaptation of new keynesian model

I'm looking for literature in new keynesian model adaptation to model price shocks. I'm aware of Blanchard, Olivier, and Jordi Gali. 2007. “The Macroeconomic Effects of Oil Shocks: Why Are the 2000s ...
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0answers
51 views

What are the linearised equations for the flexible economy in Smets and Wouters (2007)?

To solve the Smets and Wouters (2007) model, we need the linearised equation for the economy when wages and prices are flexible (monetary policy rule depends on the potential output). However, in ...
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0answers
27 views

How to deal with potential output in the Sims (2002) framework?

In Sims(2002), the author explains how one solves a linear rational expectations model. $$\Gamma_0S_t=\Gamma_1S_{t-1}+C+\Psi z_t + \Pi \mu_t$$ The only thing exogenously defined in the $z_t$ ...
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1answer
691 views

Good paper/article on the mechanisms in RBC vs New Keynesian models

I have read technical books about the (baseline) RBC and New Keynesian models. However, these books tend not to explain very intuitively the propagation mechanisms of shocks between the two models, ...
3
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1answer
84 views

Basic New Keynesian Model - Price and Wage Level after shock

I'm currently solving a new Keynesian model with government spending. It's the basic model version, with constant returns to scale on the only production factor work. Everything has worked out fine ...
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0answers
130 views

Kiyotaki-Moore v.s. Bernanke-Gertler-Gilchrist - what's the difference?

What are the key differences between (i) a model which features a "Kiyotaki-Moore collateral constraint"; and (ii) a model which incorporates a "financial accelerator" (a la Bernanke-Gertler-Gilchrist)...
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1answer
2k views

What are the assumptions of real business cycle theory and Keynesian theory?

What are the differences between the approaches of Keynes and Real Business Cycle theorists? What are the assumptions made by both the theories? How do they differ in their methodology? Do they ...