The Review of Economics and Statistics Vol. 105 No. 4 2023
The Four-Equation New Keynesian Model
Abstract
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.
- DOI
- 10.1162/rest_a_01071
- Volume
- 105
- Issue
- 4
- Pages
- 931-947
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref