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

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 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?

Introduction: Two Contributions, One Message

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

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

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

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

Extended Linearized Model ℓ t = α ℓ E t ℓ t +1 − α r ( i t − E t π t +1 ) + d t Euler Equation (EE) � � π t = β E t π t +1 + κ γ ℓ ℓ t + γ r ( i t − E t π t +1 ) Phillips Curve (PC) ◮ Two changes: α ℓ ≤ 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 γ r ≥ 0: Firms need to borrow to pay for intermediate inputs before production � × ◮ Nothing novel, except for putting them together. ◮ Note: standard NK model: α ℓ = 1, γ r = 0 ◮ Here only demand shock (news shock, β shock,...) ◮ To remember: α ’s for the EE, γ ’s for the PC

Sticky & Flex Price Versions ◮ Sticky Prices ℓ t = α ℓ E t ℓ t +1 − α r ( i t − E t π t +1 ) + d t (EE) � � π t = β E t π t +1 + κ γ ℓ ℓ t + γ r ( i t − E t π t +1 ) (PC) ◮ Flex Prices ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) mc t = γ ℓ ℓ t + γ r r t = 0 Marginal Cost (MC)

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 : E t x t +1 = 0

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 γ r α r > ( RK ) (1 − α ℓ ) γ ℓ general case : ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r r t (MC) γ ℓ

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 γ r α r > ( RK ) (1 − α ℓ ) γ ℓ general case : ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r r t (MC) γ ℓ

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 γ r α r > ( RK ) (1 − α ℓ ) γ ℓ i.i.d. case : ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r r t (MC) γ ℓ

The RK condition Result 1 With flex. prices, positive demand shocks (both current r t and expected future) always maintain a positive effects on ℓ if and only if γ r α r > ( RK ) (1 − α ℓ ) γ ℓ Marginal cost ℓ t = − γ r γ ℓ r t i.i.d. case : Euler Equation ℓ t = − α r r t + d t ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r ℓ t r t (MC) γ ℓ

The RK condition Result 1 With flex. prices, positive demand shocks (both current r t and expected future) always maintain a positive effects on ℓ if and only if γ r α r > ( RK ) (1 − α ℓ ) γ ℓ Marginal cost ℓ t = − γ r γ ℓ r t i.i.d. case : Euler Equation ℓ t = − α r r t + d t ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r ℓ t r t (MC) γ ℓ

The RK condition Result 1 With flex. prices, positive demand shocks (both current Marginal cost r t and expected future) always ℓ t = − γ r γ ℓ r t maintain a positive effects on ℓ if and only if γ r α r > ( RK ) (1 − α ℓ ) γ ℓ i.i.d. case : Euler Equation ℓ t = − α r r t + d t ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r r t (MC) ℓ t γ ℓ

The RK condition Result 1 With flex. prices, positive demand shocks (both current Marginal cost r t and expected future) always ℓ t = − γ r γ ℓ r t maintain a positive effects on ℓ if and only if γ r α r > ( RK ) (1 − α ℓ ) γ ℓ i.i.d. case : Euler Equation ℓ t = − α r r t + d t ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r r t (MC) ℓ t γ ℓ

The RK condition Result 1 With flex. prices, positive demand shocks (both current Marginal cost r t and expected future) always ℓ t = − 0 γ ℓ r t maintain a positive effects on ℓ if and only if γ r α r > ( RK ) (1 − α ℓ ) γ ℓ i.i.d. case : Euler Equation ℓ t = − α r r t + d t ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r r t (MC) ℓ t γ ℓ

The RK condition Result 1 With flex. prices, positive demand shocks (both current Marginal cost r t and expected future) always ℓ t = − 0 γ ℓ r t maintain a positive effects on ℓ if and only if γ r α r > ( RK ) (1 − α ℓ ) γ ℓ i.i.d. case : Euler Equation ℓ t = − α r r t + d t ℓ t = α ℓ E t ℓ t +1 − α r r t + d t (EE) ℓ t = − γ r r t (MC) ℓ t γ ℓ

With Sticky Prices ℓ t = α ℓ E t ℓ t +1 − α r ( i t − E t π t +1 ) + d t (EE) � � π t = β E t π t +1 + κ γ ℓ ℓ t + γ r ( i t − E t π t +1 ) + µ t (PC) i t = E t π t +1 + φ ℓ ℓ t + ν t (Policy Rule) x x x x

With Sticky Prices ℓ t = α ℓ E t ℓ t +1 − α r ( i t − E t π t +1 ) + d t (EE) � � π t = β E t π t +1 + κ γ ℓ ℓ t + γ r ( i t − E t π t +1 ) + µ t (PC) i t = E t π t +1 + φ ℓ ℓ t + ν t (Policy Rule) Result 2 With policy rule φ ℓ > 0 , the economy is determinate for all admissible parameter values.

Irrelevance Result Result 3 With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓ t = α r r t + d t (EE) � � π t = κ γ ℓ ℓ t + γ r r t + µ t (PC) r t = φ ℓ ℓ t + ν t (Policy Rule)

Irrelevance Result Result 3 With sticky prices, RK and NK configurations are not qualitatively distinguishable for demand and markup shocks. i.i.d. case : ℓ t = α r r t + d t (EE) � � π t = κ γ ℓ ℓ t + γ r r t + µ t (PC) r t = φ ℓ ℓ t + ν t (Policy Rule)

Irrelevance Result r t Policy rule r t = φ ℓ ℓ Result 3 With sticky prices, RK and NK Euler Equation configurations are not qualitatively ℓ t = − α r r t + d t distinguishable for demand and markup shocks. ℓ t π t Phillips Curve i.i.d. case : π t = κ ( γ ℓ + γ r φ ℓ ) ℓ t + µ t ℓ t = α r r t + d t (EE) � � π t = κ γ ℓ ℓ t + γ r r t + µ t (PC) r t = φ ℓ ℓ t + ν t (Policy Rule) ℓ t

Irrelevance Result r t Policy rule r t = φ ℓ ℓ Result 3 With sticky prices, RK and NK Euler Equation configurations are not qualitatively ℓ t = − α r r t + d t distinguishable for demand and markup shocks. ℓ t π t Phillips Curve i.i.d. case : π t = κ ( γ ℓ + γ r φ ℓ ) ℓ t + µ t ℓ t = α r r t + d t (EE) � � π t = κ γ ℓ ℓ t + γ r r t + µ t (PC) r t = φ ℓ ℓ t + ν t (Policy Rule) ℓ t

Irrelevance Result r t Policy rule r t = φ ℓ ℓ Result 3 With sticky prices, RK and NK Euler Equation configurations are not qualitatively ℓ t = − α r r t + d t distinguishable for demand and markup shocks. ℓ t π t Phillips Curve i.i.d. case : π t = κ ( γ ℓ + γ r φ ℓ ) ℓ t + µ t ℓ t = α r r t + d t (EE) � � π t = κ γ ℓ ℓ t + γ r r t + µ t (PC) r t = φ ℓ ℓ t + ν t (Policy Rule) ℓ t

Irrelevance Result r t Policy rule r t = φ ℓ ℓ Result 3 With sticky prices, RK and NK Euler Equation configurations are not qualitatively ℓ t = − α r r t + d t distinguishable for demand and markup shocks. ℓ t π t Phillips Curve i.i.d. case : π t = κ ( γ ℓ + γ r φ ℓ ) ℓ t + µ t ℓ t = α r r t + d t (EE) � � π t = κ γ ℓ ℓ t + γ r r t + µ t (PC) r t = φ ℓ ℓ t + ν t (Policy Rule) ℓ t

RK Matters for Monetary Policy and Monetary Shocks ◮ Monetary Policy and Stabilization ◮ Determinacy under i peg ◮ Monetary Shocks

Effects of Stabilization with Demand Shocks i t = E t π t +1 + φ ℓ ℓ t Result 4 A more aggressive policy ( φ ℓ larger) always decreases σ 2 ℓ at the cost of increasing σ 2 π iff the RK condition is satisfied.

NK Configuration ( γ r = 0, α ℓ = 1) r t Policy rule r t = φ ℓ ℓ Euler Equation ℓ t = − α r r t + d t ℓ t π t Phillips Curve π t = κγ ℓ ℓ t Phillips Curve π t = κ ( γ ℓ + γ r φ ℓ ) ℓ t ℓ t