TY - JOUR
AU - Sims, Eric R
AU - Wu, Jing Cynthia
TI - The Four Equation New Keynesian Model
JF - National Bureau of Economic Research Working Paper Series
VL - No. 26067
PY - 2019
Y2 - July 2019
DO - 10.3386/w26067
UR - http://www.nber.org/papers/w26067
L1 - http://www.nber.org/papers/w26067.pdf
N1 - Author contact info:
Eric R. Sims
Department of Economics
University of Notre Dame
3060 Jenkins Nanovic Hall
Notre Dame, IN 46556
Tel: 574/631-6309
Fax: 574/631-4783
E-Mail: esims1@nd.edu
Jing Cynthia Wu
Department of Economics
3060 Jenkins Nanovic Hall
University of Notre Dame
Notre Dame, IN 46556
E-Mail: cynthia.wu@nd.edu
AB - 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 key equations – a Phillips curve, an IS equation, and policy rules for the short term nominal interest rate and the central bank's long bond portfolio (QE). The four equation model collapses to the standard three equation New Keynesian model under a simple parameter restriction. Credit shocks and QE appear in both the IS and Phillips curves. Optimal monetary policy entails adjusting the short term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. The ability of the central bank to engage in QE significantly mitigates the costs of a binding zero lower bound.
ER -