Real Keynesian Models and Sticky Prices Article Swipe
In this paper we present a generalized sticky price model which allows, depending on the\nparameterization, for demand shocks to maintain strong expansionary effects even in the\npresence of perfectly flexible prices. The model is constructed to incorporate the standard threeequation\nNew Keynesian model as a special case. We refer to the parameterizations where\ndemand shocks have expansionary effects regardless of the degree of price stickiness as Real\nKeynesian parameterizations. We use the model to show how the effects of monetary policy - for\nthe same degree of price stickiness – differ depending whether the model parameters are within\nthe Real Keynesian subset or not. In particular, we show that in the Real Keynesian subset, the\neffect of a monetary policy that tries to counter demand shocks creates the opposite trade-off\nbetween inflation and output variability than under more traditional parameterizations. Moreover,\nwe show that under the Real Keynesian parameterization neo-Fisherian effects emerge even\nthough the equilibrium remains unique. We then estimate our extended sticky price model on U.S.\ndata to see whether estimated parameters tend to fall within the Real Keynesian subset or\nwhether they are more in line with the parameterization generally assumed in the New Keynesian\nliterature. In passage, we use the model to justify a new SVAR procedure that offers a simple\npresentation of the data features which help identify the key parameters of the model. The main\nfinding from our multiple estimations, and many robustness checks is that the data point to model\nparameters that fall within the Real Keynesian subset as opposed to a New Keynesian subset.\nWe discuss both (i) how a Real Keynesian parametrization offers an explanation to puzzles\nassociated with joint behaviour of inflation and employment during the zero lower bound period\nand during the Great Moderation period, (ii) how it potentially changes the challenge faced by\nmonetary policy if authorities want to achieve price stability and favour employment stability.
