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A New Keynesian Model with Wealth in the Utility Function

Author

Listed:
  • Pascal Michaillat

    (Brown University)

  • Emmanuel Saez

    (University of California, Berkeley)

Abstract

This paper extends the textbook New Keynesian model by introducing wealth, in the form of government bonds, in households' utility function. As bonds are in zero net supply, the IS curve imposes that output is decreasing in the real interest rate---as in the old IS-LM model. In contrast, the textbook model's IS curve imposes that the real rate is constant, equal to the time discount factor. As a result, when price rigidity and marginal utility of wealth are sufficient, our extended model's equilibrium has a unique steady state and is globally determinate, whether monetary policy is active, passive, or an interest-rate peg. This property greatly simplifies the analysis of the zero lower bound. Furthermore several pathologies of the textbook model at the zero lower bound---such as the forward-guidance puzzle---disappear.

Suggested Citation

  • Pascal Michaillat & Emmanuel Saez, 2018. "A New Keynesian Model with Wealth in the Utility Function," 2018 Meeting Papers 1276, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1276
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    Citations

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    Cited by:

    1. Ansgar Rannenberg, 2019. "Inequality, the risk of secular stagnation and the increase in household deb," Working Paper Research 375, National Bank of Belgium.
    2. Pablo A. Cuba-Borda & Sanjay R. Singh, 2019. "Understanding Persistent Stagnation," International Finance Discussion Papers 1243, Board of Governors of the Federal Reserve System (U.S.).
    3. Paul Beaudry & Césaire Meh, 2021. "Monetary Policy, Trends in Real Interest Rates and Depressed Demand," Staff Working Papers 21-27, Bank of Canada.
    4. Erik Eyster & Kristóf Madarász & Pascal Michaillat, 2021. "Pricing Under Fairness Concerns," Journal of the European Economic Association, European Economic Association, vol. 19(3), pages 1853-1898.
    5. Christian Bredemeier & Christoph Kaufmann & Andreas Schabert, 2017. "Interest Rate Spreads and Forward Guidance," Working Paper Series in Economics 96, University of Cologne, Department of Economics.
    6. Jeffrey Campbell & Jacob Weber, 2021. "Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 243-254, July.
    7. Leon Podkaminer, 2021. "Dynamic Stochastic General Equilibrium: macroeconomics at a dead end," Bank i Kredyt, Narodowy Bank Polski, vol. 52(2), pages 97-122.
    8. Paul Beaudry & Katya Kartashova & Césaire Meh, 2023. "Gazing at r-star: A Hysteresis Perspective," Staff Working Papers 23-5, Bank of Canada.
    9. Mehrotra, Neil R. & Sergeyev, Dmitriy, 2021. "Debt sustainability in a low interest rate world," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 1-18.
    10. Michau, Jean-Baptiste & Ono, Yoshiyasu & Schlegl, Matthias, 2023. "Wealth preference and rational bubbles," European Economic Review, Elsevier, vol. 156(C).
    11. Campbell, Jeffrey R. & Ferroni, Filippo & Fisher, Jonas D.M. & Melosi, Leonardo, 2019. "The limits of forward guidance," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 118-134.
    12. Müller, Tobias & Christoffel, Kai & Mazelis, Falk & Montes-Galdón, Carlos, 2022. "Disciplining expectations and the forward guidance puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    13. Petar Peshev, 2023. "Estimation of the Value, Distribution and Concentration of Wealth in Bulgaria, 1995-2020," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 104-129.
    14. Sergeyev, Dmitriy & Mehrotra, Neil, 2020. "Debt Sustainability in a Low Interest Rate World," CEPR Discussion Papers 15282, C.E.P.R. Discussion Papers.
    15. Diba, Behzad & Loisel, Olivier, 2021. "Pegging the interest rate on bank reserves: A resolution of New Keynesian puzzles and paradoxes," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 230-244.
    16. Sebastian Gechert & Jan Siebert, 2019. "Preferences over wealth," IMK Working Paper 200-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    17. Glover, Andrew, 2019. "Aggregate effects of minimum wage regulation at the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 114-128.
    18. Ansgar Rannenberg, 2019. "Forward guidance with preferences over safe assets," Working Paper Research 364, National Bank of Belgium.
    19. Gechert, Sebastian & Siebert, Jan, 2022. "Preferences over wealth: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1297-1317.
    20. Lai, Shuying & Qiu, Jing & Tao, Yuechuan & Zhao, Junhua, 2021. "Risk hedging for gas power generation considering power-to-gas energy storage in three different electricity markets," Applied Energy, Elsevier, vol. 291(C).

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