Real Keynesian Models and Sticky Prices

82 Pages Posted: 22 Jan 2018

See all articles by Paul Beaudry

Paul Beaudry

University of British Columbia (UBC) - Vancouver School of Economics; National Bureau of Economic Research (NBER)

Franck Portier

University of Toulouse I - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)

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Date Written: January 2018

Abstract

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 (i) 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, (ii) how it potentially changes the challenge faced by monetary policy if authorities want to achieve price stability and favor employment stability.

Keywords: Business cycle, monetary policy

JEL Classification: E24, E3, E32

Suggested Citation

Beaudry, Paul and Portier, Franck, Real Keynesian Models and Sticky Prices (January 2018). CEPR Discussion Paper No. DP12604, Available at SSRN: https://ssrn.com/abstract=3106808

Paul Beaudry (Contact Author)

University of British Columbia (UBC) - Vancouver School of Economics ( email )

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Franck Portier

University of Toulouse I - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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