The New Keynesian cross

The New Keynesian Model

Keynesian, Old Keynesian, and New Keynesian Wage Nominalism

Wage nominalism has long been a puzzle for economists. The original Keynesian explanation related it to a coordination failure in the context of decentralized union bargaining, a problem now in a largely nonunion U. S. labor market. Moreover, Keynesianism assumed wage nominalism as the norm rather than explaining it. New Keynesian explanations, based on implicit contracts, menu costs, and other...

The New-Keynesian Liquidity Trap

In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. The model also makes unusual policy predictions: Useless government spending, technical regress, and capital destruction have large multipliers. These predictions become larger as prices become less sticky. I show that both data and policy predictions are strongly affected by equilibrium...

The new-Keynesian Liqudity Trap

In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. Useless government spending, technical regress, and capital destruction have large positive multipliers. The recession, deflation and policy paradoxes are larger when prices are less sticky. I show that these features are all artifacts of equilibrium selection. For the same interest-rate...

New Keynesian Roots

The stability properties of a macromodel are determined by its characteristic roots. Conventional price level determinacy is achieved by imposing restrictions on policy rules so that the characteristic roots satisfy a saddlepath criterion. This paper shows how to choose arbitrary roots for the canonical New Keynesian macromodel using a simple forward-looking Taylor-type policy rule. We are able...