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Peculiar Results and Theoretical Inconsistency of New Keynesian Models

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  • Kim, Minseong

Abstract

In this paper, several flaws of the basic no-capital/labor-only New Keynesian model are discussed. Some flaws were left undiscovered because mass of varieties n in Dixit-Stiglitz aggregator is often considered as not affecting overall outcomes. Only when n=1 would ordinary results of the basic New Keynesian model hold. To save the theory, we consider the case where production function exhibits constant return to scale for its input labor, then concludes that linear production function itself leads to other sets of problems. The aforementioned results are proven by checking several limit cases of the basic New Keynesian model, which itself is the limit case model of several New Keynesian models. Then we show some problems with applying transversality condition to consumption Euler equation of the model.

Suggested Citation

  • Kim, Minseong, 2014. "Peculiar Results and Theoretical Inconsistency of New Keynesian Models," MPRA Paper 61106, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:61106
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    File URL: https://mpra.ub.uni-muenchen.de/61106/27/MPRA_paper_61106.pdf
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    References listed on IDEAS

    as
    1. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters, in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press.
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    More about this item

    Keywords

    Dixit-Stiglitz aggregator; CES; New Keynesian model; Inconsistency; production function; consumption Euler equation; IS curve; transversality condition; monetary rule;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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