Some Unpleasant Properties of Log-Linearized Solutions When the Nominal Rate is Zero

54 Pages Posted: 22 Mar 2015

See all articles by R. Braun

R. Braun

Federal Reserve Bank of Atlanta

Lena Koerber

London School of Economics & Political Science (LSE)

Yuichiro Waki

University of Tokyo

Multiple version iconThere are 2 versions of this paper

Date Written: September 2012

Abstract

Does fiscal policy have qualitatively different effects on the economy in a liquidity trap? We analyze a nonlinear stochastic New Keynesian model and compare the true and loglinearized equilibria. Using the loglinearized equilibrium conditions, the answer to the above question is yes. However, for the true nonlinear model, the answer is no. For a broad range of empirically relevant parameterizations, labor falls in response to a tax cut in the loglinearized economy but rises in the true economy. While the government purchase multiplier is above two in the loglinearized economy it is about one in the true economy.

Keywords: monetary policy, fiscal policy, zero bound

JEL Classification: H30, E12, E62, E50

Suggested Citation

Braun, R. and Koerber, Lena and Waki, Yuichiro, Some Unpleasant Properties of Log-Linearized Solutions When the Nominal Rate is Zero (September 2012). FRB Atlanta Working Paper No. 2012-5a, Available at SSRN: https://ssrn.com/abstract=2479579 or http://dx.doi.org/10.2139/ssrn.2479579

R. Braun (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Lena Koerber

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Yuichiro Waki

University of Tokyo

Hongo 7-3-1
Bunkyo-ku
Tokyo 113-0033, Tokyo
Japan

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