At the risk of some oversimplification, the leading alternatives to the neoclassical / real business cycle model for understanding short run fluctuations are Keynesian models. I phrase this in the plural because there are multiple different versions of the Keynesian model, which differ in terms of how the aggregate supply block of the economy is formulated. Whereas neoclassical models emphasize...

A wrong model can lead to a wrong conclusion. The failure to capture inflation dynamics has made the standard New Keynesian framework of monetary policy analysis prone to such a critique. In this paper, we investigate optimal monetary policy using a model that can capture the observed inflation persistence. The model, which we call the dual stickiness model, integrates sticky prices and sticky ...

Stagnation as the new norm and fiscal policy are examined in a New Keynesian model with adaptive learning determining expectations. We impose inflation and consumption lower bounds, which can be relevant when agents are pessimistic. The inflation target is locally stable under learning. Pessimistic initial expectations may sink the economy into steady-state stagnation with deflation. The deflat...

This paper examines the optimal (first-best) tax policy in a stochastic representative agent model that exhibits a “keeping up with the Joneses” utility function and imperfectly competitive product markets. We show that the optimal labor tax is a constant, whose sign is determined by the relative strength of consumption externality and monopoly power. Moreover, the optimal capital tax is unambi...

This paper examines the optimal (first-best) fiscal policy in a stochastic, infinite-horizon representative agent model that exhibits a “keeping up with the Joneses” utility function and imperfectly competitive product markets. We find that the optimal labor tax is a constant, whose sign is determined by the relative strength of consumption externality and monopoly power. Moreover, the optimal ...

This paper develops a small open economy, sticky-price model that determines a unique, stable long-run asset position for households as function of their incentive to anticipate or postpone consumption and labor effort across periods. This is accomplished by adopting an overlapping-generations structure in which new households with no assets enter the economy in each period. The same characteri...

This paper aims to explain the change in the rate of inflation within the United States economy by following a new Classical–Keynesian synthesis view and by incorporating private inflation expectations directly into the inflation determination process. A parsimonious unrestricted VAR approach is adopted to expose the longrun solution that is subsequently included in an error-correction model wi...