The Four-Equation New Keynesian Model

Bibliographic Data

ID19317322
AuthorsEric Sims (Notre Dame and NBER), Jialin Christina Wu (0000-0003-4239-1233, Notre Dame of Dadiangas University), Jing Cynthia Wu (Notre Dame and NBER), Ji Zhang (0000-0001-9544-9801, Tsinghua PBCSF)
Year2023
Volume105
Issue4
Pages931-947
Publication date2023-07-11
Peer ReviewedYes
Open AccessNo
TypeARTICLE
VenueThe Review of Economics and Statistics (JOURNAL)
Journal identifiersISSN: 0034-6535 • E-ISSN: 1530-9142
PublisherMIT Press (PUBLISHER • US)
DOI10.1162/rest_a_01071
OpenAlexW4240018265
LanguageEN
Citations received1
References cited19

This paper develops a New Keynesian model featuring financial intermediation, short- and long-term bonds, credit shocks, and scope for unconventional monetary policy. The log-linearized model reduces to four equations: Phillips and IS curves, as well as policy rules for the short-term interest rate and the central bank's long-bond portfolio (QE). Credit shocks and QE appear in both the IS and Phillips curves. In equilibrium, optimal monetary policy entails adjusting the short-term interest rate to offset natural rate shocks but using QE to offset credit market disruptions. Use of QE significantly mitigates the costs of a binding zero lower bound

Bond · Bond market · Central bank · Econometrics · Economics · Financial economics · Financial intermediary · Interest rate · Keynesian economics · Macroeconomics · Monetary economics · Monetary policy · New Keynesian economics · Offset (computer science) · Phillips curve · Portfolio · Quantitative easing · Zero lower bound · Economic theories and models · Economic Theory and Policy · Finance · Monetary Policy and Economic Impact

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