Resurrecting the New-Keynesian Model: (Un)Conventional Policy and the Taylor Rule

53 Pages Posted: 28 Feb 2018 Last revised: 18 Sep 2019

See all articles by Olaf Posch

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: September 17, 2019

Abstract

This paper explores the ability of the New Keynesian (NK) model to explain the recent periods of quiet and stable inflation at near-zero nominal interest rates. We show that temporary and permanent shocks to the natural rate (and inflation) are sufficient for the ability of the simple NK model to explain the recent facts. Based on the identified shocks, we show that the model can replicate key macroeconomic variables in accordance with the term structure of interest rates. We find that the term structure helps to identify permanent shocks. Our analysis is restricted to an active role of monetary policy and the traditional regions of (local) determinacy. We also show that capturing highly nonlinear dynamics can be useful to generate a prolonged period of near-zero interest rates as a policy choice.

Keywords: Monetary economics, Calvo pricing, Term structure of interest rates

JEL Classification: E32, E12, C61

Suggested Citation

Posch, Olaf, Resurrecting the New-Keynesian Model: (Un)Conventional Policy and the Taylor Rule (September 17, 2019). Available at SSRN: https://ssrn.com/abstract=3130903 or http://dx.doi.org/10.2139/ssrn.3130903

Olaf Posch (Contact Author)

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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