New Keynesian Dynamics in a Low Interest Rate Environment

31 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)

Date Written: May 2011

Abstract

Recent research has found that the dynamic properties of the New Keynesian model can be very different when the nominal interest rate is zero. Improvements in technology and reductions in the labor tax rate lower economic activity, and the size of the government purchase output multiplier can be well above one. This paper provides evidence that the focus on specifications of the New Keynesian model that produce unorthodox results in a liquidity trap may be misplaced. We show that a prototypical New Keynesian model fit to Japanese data exhibits orthodox dynamics during Japan's episode with zero interest rates. We then demonstrate that this specification is more consistent with outcomes in Japan than alternative specifications that have unorthodox properties.

Keywords: government purchases, zero nominal interest rates, monetary policy

JEL Classification: E03, E05, E06

Suggested Citation

Braun, R. and Koerber, Lena, New Keynesian Dynamics in a Low Interest Rate Environment (May 2011). FRB Atlanta Working Paper No. 2011-10, Available at SSRN: https://ssrn.com/abstract=2481062 or http://dx.doi.org/10.2139/ssrn.2481062

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

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