Real Keynesian Models and Sticky Prices
In this paper we present a generalized sticky price model which allows, depending on the parameterization, for demand shocks to maintain strong expansionary effects even in the presence of perfectly flexible prices. The model is constructed to incorporate the standard three-equation New Keynesian model as a special case. We refer to the parameterizations where demand shocks have expansionary effects regardless of the degree of price stickiness as Real Keynesian parameterizations. We use the model to show how the effects of monetary policy–for the same degree of price stickiness–differ depending whether the model parameters are within the Real Keynesian subset or not. In particular, we show that in the Real Keynesian subset, the effect of a monetary policy that tries to counter demand shocks creates the opposite tradeoff between inflation and output variability than under more traditional parameterizations. Moreover, we show that under the Real Keynesian parameterization neo-Fisherian effects emerge even though the equilibrium remains unique. We then estimate our extended sticky price model on U.S. data to see whether estimated parameters tend to fall within the Real Keynesian subset or whether they are more in line with the parameterization generally assumed in the New Keynesian literature. In passage, we use the model to justify a new SVAR procedure that offers a simple presentation of the data features which help identify the key parameters of the model. The main finding from our multiple estimations, and many robustness checks is that the data point to model parameters that fall within the Real Keynesian subset as opposed to a New Keynesian subset. We discuss both how a Real Keynesian parametrization offers an explanation to puzzles associated with joint behavior of inflation and employment during the zero lower bound period and during the Great Moderation period, how it potentially changes the challenge faced by monetary policy if authorities want to achieve price stability and favor employment stability.
The authors thank participants in seminars at University of Edinburgh, Einaudi Institute for Economics and Finance, University College London and Toulouse School of Economics for comments on early version of this paper. Paul Beaudry thanks the Canadian Social Science and Humanities Research Council for supporting this research. Franck Portier acknowledges financial support by the ADEMU project, “A Dynamic Economic and Monetary Union,” funded by the European Union’s Horizon 2020 Program under grant agreement No 649396. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Franck Portier acknowledges financial support by the ADEMU project, ``A Dynamic Economic and Monetary Union," funded by the European Union's Horizon 2020 Program under grant agreement No 649396.}