Real Keynesian Models and Sticky Prices Paul Beaudry & Franck - - PowerPoint PPT Presentation

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Real Keynesian Models and Sticky Prices Paul Beaudry & Franck - - PowerPoint PPT Presentation

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Real Keynesian Models and Sticky Prices Paul Beaudry & Franck Portier UBC & UCL 49th Konstanz Seminar on Monetary Theory and Monetary Policy May 2018 Strandhotel L ochnerhaus Introduction : Demand Shocks In most macro

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SLIDE 1

Real Keynesian Models and Sticky Prices

Paul Beaudry & Franck Portier UBC & UCL 49th Konstanz Seminar on Monetary Theory and Monetary Policy May 2018 – Strandhotel L¨

  • chnerhaus
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SLIDE 2

Introduction : Demand Shocks

◮ In most macro models... ◮ price stickiness = source of money non neutrality... ◮ ... and of demand shocks non neutrality ◮ There are alternative modelling choices for demand non-neutrality: ◮ Demand driven fluctuations in flex. price environments (Ex: Angeletos-La’O,

Angeletos-Lian, Guerrieri-Lorenzoni, Lorenzoni, Beaudry-Portier, Beaudry-Galizia-Portier,... etc Real Keynesian models

◮ Should we care for better understanding the effect of monetary policy?

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SLIDE 3

Introduction: Two Contributions, One Message

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SLIDE 4

Introduction: Two Contributions

◮ Contributions

  • 1. Propose a new class of simple extensions of the New Keynesian model (the Real

Keynesian model) that has very different implications for monetary policy

  • 2. Propose a novel way to identify shocks in SVARs
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SLIDE 5

Introduction: One Message

“The theory of natural output matters to understand the impact of monetary policy on the output gap”

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SLIDE 6

Roadmap

  • 1. Theory & Estimation
  • 2. Dissecting the results using a new SVAR approach
  • 3. Zero Lower Bound and Missing Deflation
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SLIDE 7

Roadmap

  • 1. Theory & Estimation
  • 2. Dissecting the results using a new SVAR approach
  • 3. Zero Lower Bound and Missing Deflation
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SLIDE 8

Extended Linearized Model

ℓt = αℓEtℓt+1 − αr(it − Etπt+1) + dt Euler Equation (EE) πt = βEtπt+1 + κ

  • γℓℓt + γr(it − Etπt+1)
  • Phillips Curve (PC)

◮ Two changes:

× αℓ ≤ 1 : Add asymmetric information: some households always repay their debt, some do only if it is in their interest positively sloped cost of funds discounted EE × γr ≥ 0: Firms need to borrow to pay for intermediate inputs before production

◮ Nothing novel, except for putting them together. ◮ Note: standard NK model: αℓ = 1, γr = 0 ◮ Here only demand shock (news shock, β shock,...) ◮ To remember: α’s for the EE, γ’s for the PC

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SLIDE 9

Sticky & Flex Price Versions

◮ Sticky Prices

ℓt = αℓEtℓt+1 − αr(it − Etπt+1) + dt (EE) πt = βEtπt+1 + κ

  • γℓℓt + γr(it − Etπt+1)
  • (PC)

◮ Flex Prices

ℓt = αℓEtℓt+1 − αrrt + dt (EE) mct = γℓℓt + γrrt = 0 Marginal Cost (MC)

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SLIDE 10

The i.i.d. Case

◮ I will give some graphical interpretation in the specific case where shocks are i.i.d. ◮ In that case, for any variable x : Etxt+1 = 0

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SLIDE 11

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) general case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC)

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SLIDE 12

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) general case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC)

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SLIDE 13

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) i.i.d. case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC)

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SLIDE 14

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) i.i.d. case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC) ℓt rt

Marginal cost ℓt = − γr

γℓ rt

Euler Equation ℓt = −αrrt + dt

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SLIDE 15

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) i.i.d. case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC) ℓt rt

Marginal cost ℓt = − γr

γℓ rt

Euler Equation ℓt = −αrrt + dt

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SLIDE 16

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) i.i.d. case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC) ℓt rt

Marginal cost ℓt = − γr

γℓ rt

Euler Equation ℓt = −αrrt + dt

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SLIDE 17

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) i.i.d. case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC) ℓt rt

Marginal cost ℓt = − γr

γℓ rt

Euler Equation ℓt = −αrrt + dt

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SLIDE 18

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) i.i.d. case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC) ℓt rt

Marginal cost ℓt = − 0

γℓ rt

Euler Equation ℓt = −αrrt + dt

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SLIDE 19

The RK condition

Result 1

With flex. prices, positive demand shocks (both current and expected future) always maintain a positive effects on ℓ if and only if γr γℓ > αr (1 − αℓ) (RK) i.i.d. case : ℓt = αℓEtℓt+1 − αrrt + dt (EE) ℓt = −γr γℓ rt (MC) ℓt rt

Marginal cost ℓt = − 0

γℓ rt

Euler Equation ℓt = −αrrt + dt

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SLIDE 20

With Sticky Prices

ℓt = αℓEtℓt+1 − αr(it − Etπt+1) + dt (EE) πt = βEtπt+1 + κ

  • γℓℓt + γr(it − Etπt+1)
  • + µt

(PC) it = Etπt+1 + φℓℓt + νt (Policy Rule) x x x x

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SLIDE 21

With Sticky Prices

ℓt = αℓEtℓt+1 − αr(it − Etπt+1) + dt (EE) πt = βEtπt+1 + κ

  • γℓℓt + γr(it − Etπt+1)
  • + µt

(PC) it = Etπt+1 + φℓℓt + νt (Policy Rule)

Result 2

With policy rule φℓ > 0, the economy is determinate for all admissible parameter values.

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SLIDE 22

Irrelevance Result

Result 3

With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓt = αrrt + dt (EE) πt = κ

  • γℓℓt + γrrt
  • + µt

(PC) rt = φℓℓt + νt (Policy Rule)

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SLIDE 23

Irrelevance Result

Result 3

With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓt = αrrt + dt (EE) πt = κ

  • γℓℓt + γrrt
  • + µt

(PC) rt = φℓℓt + νt (Policy Rule)

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SLIDE 24

Irrelevance Result

Result 3

With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓt = αrrt + dt (EE) πt = κ

  • γℓℓt + γrrt
  • + µt

(PC) rt = φℓℓt + νt (Policy Rule) ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ(γℓ+γrφℓ)ℓt +µt

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SLIDE 25

Irrelevance Result

Result 3

With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓt = αrrt + dt (EE) πt = κ

  • γℓℓt + γrrt
  • + µt

(PC) rt = φℓℓt + νt (Policy Rule) ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ(γℓ+γrφℓ)ℓt +µt

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SLIDE 26

Irrelevance Result

Result 3

With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓt = αrrt + dt (EE) πt = κ

  • γℓℓt + γrrt
  • + µt

(PC) rt = φℓℓt + νt (Policy Rule) ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ(γℓ+γrφℓ)ℓt +µt

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SLIDE 27

Irrelevance Result

Result 3

With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓt = αrrt + dt (EE) πt = κ

  • γℓℓt + γrrt
  • + µt

(PC) rt = φℓℓt + νt (Policy Rule) ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ(γℓ+γrφℓ)ℓt +µt

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SLIDE 28

RK Matters for Monetary Policy and Monetary Shocks

◮ Monetary Policy and Stabilization ◮ Determinacy under i peg ◮ Monetary Shocks

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SLIDE 29

Effects of Stabilization with Demand Shocks

it = Etπt+1 + φℓℓt

Result 4

A more aggressive policy (φℓ larger) always decreases σ2

ℓ at the cost of increasing σ2 π iff

the RK condition is satisfied.

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SLIDE 30

NK Configuration (γr = 0, αℓ = 1)

ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κγℓℓt

Phillips Curve πt = κ(γℓ + γrφℓ)ℓt

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SLIDE 31

NK Configuration (γr = 0, αℓ = 1)

ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κγℓℓt

Phillips Curve πt = κ(γℓ + γrφℓ)ℓt

ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κγℓℓt

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SLIDE 32

Under RK (γr large enough)

ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ(γℓ + γrφℓ)ℓt

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SLIDE 33

Under RK (γr large enough)

ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ(γℓ + γrφℓ)ℓt

ℓt rt

Policy rule rt = φℓℓ Euler Equation ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ(γℓ + γrφℓ)ℓt

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SLIDE 34

Nominal Interest Rate Peg (ZLB)

◮ Suppose policy goes from

it = Etπt+1 + φ2ℓt to it = 0.

Result 5

In the NK configuration,

× indeterminacy × in all equilibria, σ2

ℓ and σ2 π move together (conditional on demand shocks)

In the RK configuration,

× determinacy × σ2

ℓ increases but σ2 π decreases (conditional on demand shocks)

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SLIDE 35

Monetary Shocks

Result 6

In response to a contractionary monetary shocks,

◮ If the shock is not very persistent, then NK and RK canot be distinguished. ◮ If shock is sufficiently persistent,

× it increases inflation in RK case (neo-Fisherian effect) × it decreases inflation in the NK case

◮ RK favoured if we observe both (1) persistent monetary shock that (2) do not

lead to a fall in inflation

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SLIDE 36

Estimation

◮ Data:

× π: GDP deflator, × it: fed funds rate, × ℓt: minus unemployment rate.

◮ Sample:

× long: 1954:3- 2007:4, × post-Volker-deflation sample: 1983:4-2007:4

◮ Maximum Likelihood estimation

Result 7

Estimation shows that the model is in the Real Keynesian region.

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SLIDE 37

Estimation

Estimated Parameters, 1954Q3-2007Q1, GDP deflator ℓt = .65Etℓt+1 − .33⋆(it − Etπt+1)−.38µt + dt (EE) πt = .99⋆πt+1 + 1⋆(.05ℓt + .07(it − Etπt+1)) + µt (PC) it = Etπt+1 + .33dt−1.06µt + νt (Policy)

◮ RK condition is satisfied: .07 × (1 − .65)

  • .0245

> .05 × .33

  • .0165
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SLIDE 38

Roadmap

  • 1. Theory & Estimation
  • 2. Dissecting the results using a new SVAR approach
  • 3. Zero Lower Bound and Missing Deflation
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SLIDE 39

SVAR representation

◮ The model solution writes

  πt it ℓt  

  • Yt

= A(Θ)   πt−1 it−1 ℓt−1   + B(Θ)   dt µt νt  

  • St

  dt µt νt   =   ρd ρµ ρµ  

  • R(Θ)

  dt−1 µt−1 νt−1   +   εdt εµt ενt  

  • εt

◮ This is what we use for ML in order to obtain

Θ.

◮ But we can also estimate in two-steps:

× First A, B and R, × Second Θ.

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SLIDE 40

Using The Structural Zeros

Yt = A(Θ)Yt−1 + B(Θ)St St = R(Θ)St−1 + εt where Θ are the strutural parameters

Result 8

◮ Under the assumptions that we make for the ML estimation (Yt observable, lag

  • rder is known, St are latent variables)

◮ if R is diagonal (at least triangular), ◮ then A, B and R can be identified, and so can be the structural shocks ε ◮ This uniquely defines structural shocks and IRF (but no names for the shocks) ◮ Then a second stage is to find the mapping from A, B and R to structural

parameters Θ.

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SLIDE 41

SVAR, Full Sample

ε1 ε2 ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

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SLIDE 42

SVAR, Full Sample

ε1 εd ε2 ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

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SLIDE 43

SVAR, Full Sample

ε1 εd ε2 ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2

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SLIDE 44

SVAR, Full Sample

ε1 εd ε2 εµ ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2

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SLIDE 45

SVAR, Full Sample

ε1 εd ε2 εµ ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5

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SLIDE 46

SVAR, Full Sample

ε1 εd ε2 εµ ε3 εν

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5

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SLIDE 47

SVAR, Full Sample

ε1 εd ε2 εµ ε3 εν

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5

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SLIDE 48

SVAR, Full Sample

ε1 εd ε2 εµ ε3 εν

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5

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SLIDE 49

Max Likelihood Estimation, Full Sample

εd εµ εν

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5

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SLIDE 50

Three Sub-Samples

  • I. Pre Volker dis-inflation

period (1954:3-1979:1)

  • II. Post Volker

dis-inflation period (1983:4-2007:1)

  • III. Zero Lower Bound

period (2009:1-2016:3) ε1 εd (I) ε1 εd (I) ε1 εd (I)

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SLIDE 51

Three Sub-Samples

  • I. Pre Volker dis-inflation

period (1954:3-1979:1)

  • II. Post Volker

dis-inflation period (1983:4-2007:1)

  • III. Zero Lower Bound

period (2009:1-2016:3) ε1 εd (I)

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7

ε1 εd (II)

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5

ε1 εd (III)

5 10 15 20 25 30 35 40

  • 0.05

0.05 0.1 0.15 0.2 0.25 0.3 0.35

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SLIDE 52

Three Sub-Samples

  • I. Pre Volker dis-inflation

period (1954:3-1979:1)

  • II. Post Volker

dis-inflation period (1983:4-2007:1)

  • III. Zero Lower Bound

period (2009:1-2016:3) ε1 εd (I) ε2 εµ (I)

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 5 10 15 20 25 30 35 40

  • 0.2

0.2 0.4 0.6 0.8 1 1.2

ε1 εd (II) ε2 εµ (II)

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

ε1 εd (III) ε2 εµ (III)

5 10 15 20 25 30 35 40

  • 0.05

0.05 0.1 0.15 0.2 0.25 0.3 0.35 5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

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SLIDE 53

Three Sub-Samples

  • I. Pre Volker dis-inflation

period (1954:3-1979:1)

  • II. Post Volker

dis-inflation period (1983:4-2007:1)

  • III. Zero Lower Bound

period (2009:1-2016:3) ε1 εd (I) ε2 εµ (I) ε3 εν (I)

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 5 10 15 20 25 30 35 40

  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5 0.6

ε1 εd (II) ε2 εµ (II) ε3 εν (II)

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.2
  • 0.15
  • 0.1
  • 0.05

0.05 0.1 0.15

ε1 εd (III) ε2 εµ (III)

5 10 15 20 25 30 35 40

  • 0.05

0.05 0.1 0.15 0.2 0.25 0.3 0.35 5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

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SLIDE 54

Robustness

  • 1. Are these results robust to allowing the model to have endogenous propagation?
  • 2. Are these results robust to allowing the model to have more shocks?
  • 3. Yes and yes.
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SLIDE 55

Can we obtain more standard effects of monetary shocks?

◮ Note that the RK model is not inconsistent with VAR evidence that finds

temporary monetary shocks.

◮ But those shocks (as opposed to persistent monetary shocks) do not seem to be

relevant in a simple 3-shocks framework.

slide-56
SLIDE 56

Roadmap

  • 1. Theory
  • 2. Dissecting the results using a new SVAR approach
  • 3. Zero Lower Bound and Missing Deflation
slide-57
SLIDE 57

Low Variance of Inflation at the ZLB

σu σπ σi Post-Volcker : 1.3 .9 2.5 ZLB : 1.7 .8 .1

◮ Observation: the variance of inflation slightly decreased at lower bound. ◮ It should have increased in the NK configuration ◮ But this is consistent with the RK configuration

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SLIDE 58

Zero Lower Bound and Missing Deflation

ℓt rt

Policy rule rt = max

  • 0, φℓℓt
  • Euler Equation

ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κγℓℓt

slide-59
SLIDE 59

Zero Lower Bound and Missing Deflation

ℓt rt

Policy rule rt = max

  • 0, φℓℓt
  • Euler Equation

ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κγℓℓt

slide-60
SLIDE 60

Zero Lower Bound and Missing Deflation

ℓt rt

Policy rule rt = max

  • 0, φℓℓt
  • Euler Equation

ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κγℓℓt

ℓt rt

Policy rule rt = max

  • 0, φℓℓt
  • Euler Equation

ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ

  • γℓℓt + γr max
  • 0, φℓℓt
slide-61
SLIDE 61

Zero Lower Bound and Missing Deflation

ℓt rt

Policy rule rt = max

  • 0, φℓℓt
  • Euler Equation

ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κγℓℓt

ℓt rt

Policy rule rt = max

  • 0, φℓℓt
  • Euler Equation

ℓt = −αrrt + dt

ℓt πt

Phillips Curve πt = κ

  • γℓℓt + γr max
  • 0, φℓℓt
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SLIDE 62

The ZLB Trap

◮ RK framework suggest that ZLB was quasi inevitable following a persistent fall in

demand.

◮ In RK, both the fall in demand and the response of monetary authorities favours

lower inflation:

× Low inflation × Monetary expansion stimulus × Lower i and lower inflation × More monetary expansion × Even lower i and inflation × Hit the zero lower bound.

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SLIDE 63

Summary

◮ When demand matters with flexible prices (Real Keynesian models), adding sticky

prices affect the way we think of monetary policy:

× trade-off between stabilising inflation and output when facing demand shocks × Determinacy at the ZLB × Variance of inflation and output moving in opposite direction at the ZLB

◮ Data favours Real Keynesian configuration ◮ Main reason is that monetary shocks are persistent and they have neo-Fisherian

effect

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SLIDE 64
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SLIDE 65

Introducing more endogenous dynamics

◮ Let us think of richer dynamics

× Habit persistence × Hybrid New Phillips curve × Gradual adjustment of i

◮ It amounts to constraining more or less columns of A to be zero.

Yt = AYt−1 + BSt St = RSt−1 + εt

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SLIDE 66

Full Sample,“Habit Persistence”

ε1 ε2 ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2

0.2 0.4 0.6 0.8

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SLIDE 67

Other configurations, Full sample

“Habit persistence, and hybrid New Phillips curve” ε1 ε2 ε3

5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5 0.6 0.7 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 5 10 15 20 25 30 35 40

  • 0.2

0.2 0.4 0.6 0.8

“Habit persistence, gradual adjustment of i and hybrid New Phillips curve”

ε1 ε2 ε3

5 10 15 20 25 30 35 40

  • 0.1

0.1 0.2 0.3 0.4 0.5 0.6 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 5 10 15 20 25 30 35 40

  • 0.2

0.2 0.4 0.6 0.8

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SLIDE 68

Allowing for more shocks

◮ Enrich the analysis by:

× Allowing for explicit oil shocks × Allowing for TFP shocks × Allowing for natural rate of employment shocks

◮ We find very consistent results

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SLIDE 69

Real growth (∆y) as the Fourth Variable

“Fully Forward”, Full sample ε1 ε2 ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2
  • 0.1

0.1 0.2 0.3 0.4 0.5

“Habit persistence”, Full sample ε1 ε2 ε3

5 10 15 20 25 30 35 40 0.1 0.2 0.3 0.4 0.5 0.6 0.7 5 10 15 20 25 30 35 40

  • 0.4
  • 0.2

0.2 0.4 0.6 0.8 1 1.2 5 10 15 20 25 30 35 40

  • 0.2

0.2 0.4 0.6 0.8