A New Keynesian Model with Wealth in the Utility Function
Pascal Michaillat, Emmanuel Saez
DOI for all versions · https://doi.org/10.5281/zenodo.1186338
March 2019
DOI for all versions · https://doi.org/10.5281/zenodo.1186338
March 2019
abstract · The New Keynesian model suffers from several anomalies at the zero lower bound: explosive output and inflation, forward-guidance puzzle, and explosive government-spending multiplier. To resolve these anomalies, we introduce relative wealth into households' utility function; the justification is that relative wealth is a marker of social status, and people value high social status. Since people save not only for future consumption but also to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the equilibrium at the zero lower bound becomes a source instead of a saddle, which resolves all the anomalies.