This paper evaluates quantitatively the effect of real money balances in a New Keynesian framework. Money in our model facilitates transactions and is introduced through a transactions cost technology. This technology acts like a distortionary consumption tax which varies endogenously with the nominal interest rate. In this setup the resultant Phillips curve becomes a function of the nominal in...

We consider the effect of money illusion defined referring to Stevens' ratio estimation function on the long-run Phillips curve in an otherwise standard New Keynesian model of sticky wages. We show that if households under-perceive real economic variables, negative money non-superneutralities will become more severe. On the contrary, if households over-perceive real variables, positive money no...

We propose behavioral learning equilibria as a plausible explanation of coordination of individual expectations and aggregate phenomena such as excess volatility in stock prices and high persistence in inflation. Boundedly rational agents use a simple univariate linear forecasting rule and correctly forecast the unconditional sample mean and first-order sample autocorrelation. In the long run, ...

Section A gives empirical results for the Angrist and Krueger (1991) data and discusses implementation of PI tests and confidence sets. Section B provides further details on the derivation of the limit problems discussed in Section 2 of the paper. Section C shows that general nonlinear GMM models which are weakly identified in the sense of Stock and Wright (2000) give rise to limiting problems ...

We study the design of optimal monetary policy under uncertainty using a Markov jumplinear-quadratic (MJLQ) approach. We approximating the uncertainty that policymakers face by different discrete modes in a Markov chain, and by taking mode-dependent linear-quadratic approximations of the underlying model. This allows us to apply a powerful methodology with convenient solution algorithms that we...

This paper looks at whether sticky-price New Keynesian models with microfounded inertia can usefully describe US data. We estimate a range of models, considering specifications with either internal or external consumption habits, specifications containing Taylor-type rules or an optimal discretionary rule, and specifications where inflation is driven by movements in either the gap or real margi...

In this chapter, the focus shifts away models with ‡exible wages and prices to models of sticky wages and prices. We begin this chapter with a simple example of a model with nominal wage rigidities that last for one period. We then review models that account for the observation that prices and wages may take several periods to adjust to changes in macroeconomic conditions. Time-dependent and st...

This paper compares three reduced-form models of heterogeneity in survey inflation expectations. On the one hand, we specify two models of forecasting inflation based on limited information flows of the type developed in Mankiw and Reis [2002. Sticky information versus sticky prices: a proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics 117(4), 1295–1328]. We pr...

This paper studies optimal policy in a stylised New Keynesian model that is extended to incorporate imperfect substitutability between short-term and long-term bonds. This simple modification provides a channel through which asset purchases by the policymaker can affect aggregate demand. Because assets are imperfect substitutes, central bank asset purchases that alter the relative supplies of a...

In recent work, Woodford (2001) presents evidence that using real unit labor costs (labor’s share of income) as a driving variable in the new-Keynesian Phillips curve yields a superior fit for inflation relative to a model that uses deterministically detrended real GDP. This evidence leads him to conclude that the output gap—the deviation between actual and potential output—is better captured b...