Keynesian Macroeconomic Model Research Articles

The COVID-19 recession on both sides of the Atlantic: A model-based comparison

This paper compares the COVID-19 recession in the euro area (EA) and the US using an estimated multi-region New Keynesian macroeconomic model. To capture quarterly dynamics from 2020 onwards, we introduce relevant extensions such as ‘forced’ savings, extensive versus intensive employment margins, and trade in commodities as inputs to production and final demand. Transitory (‘forced’) savings are central to account for the behaviour of economic activity in both regions during the pandemic, which was strongly driven by private consumption, alongside other shocks to domestic demand and shocks to foreign activity. The model highlights the importance of demand recovery and rising commodity prices for the inflation acceleration during 2021–22. EA inflation has a stronger supply component (including commodity prices) compared to a stronger demand component in the US.

Inflation tolerance ranges in the New Keynesian model

A number of central banks in advanced countries use ranges, or bands, around their inflation target to formulate their monetary policy strategy. The adoption of such ranges has been proposed by some policymakers in the context of the Fed and the ECB reviews of their strategies. Using a standard New Keynesian macroeconomic model, we analyze the consequences of tolerance range policies, characterized by a stronger reaction of the central bank to inflation when inflation lies outside the range, than when it is close to the target, i.e. the central value of the band. We show that (i) a tolerance band should not be a zone of inaction: the lack of reaction may trigger substantial unwarranted volatility and lead to multiple equilibria; (ii) the trade-off between the reaction needed outside the range versus inside appears unfavorable: a very strong reaction, when inflation is far from the target, is required to compensate for a moderately lower reaction within tolerance band; (iii) these results, obtained within the framework of a stylized model, are robust to many alterations, in particular allowing for the zero lower bound.

Keynesian approach to economy regulation: answers to the challenges facing the agro-industrial complex

The paper presents the main aspects of the Keynesian theory of state economic policy in the context of responding to global challenges and national barriers facing the development of the Russian agro-industrial complex. The purpose of the work is to explore the possibilities of the Keynesian approach to respond to the challenges facing the agro-industrial complex of modern Russia. The methodological basis of the study is an integrated approach. The study identifies the main postulates of Keynesian theory. On the basis of macroeconomic models of aggregate demand and aggregate supply, the Keynesian cross, the features of the Keynesian approach to the regulation of economic activity in terms of investment, savings, and consumption are formulated. The Keynesian macroeconomic model of state policy is presented, implemented by increasing the real volume of investment expenditures through fiscal and monetary policies; methods of increasing effective solvent demand; reducing the fiscal burden on the population and business. The limits of the application of Keynesian methods are defined: "liquidity trap”; the emergence of a chronic budget deficit; the attenuation of the multiplier-acceleration mechanism; “stagflation”; “inflationary spiral”. The relevance of the application of Keynesian methods of regulation in the modern Russian agro-industrial complex is substantiated: fiscal methods can have a beneficial effect on the development of agriculture: the growth of investments in the agricultural sector by 1%, stimulates economic growth in the industry by 0.64%; monetary methods have a long-term significant impact on the agricultural sector development; an increase in effective solvent demand for food in conditions of insufficient demand for food products in Russia is of high importance; a reduction in the fiscal burden can have a beneficial impact on agriculture development.

Inflation tolerance ranges in the New Keynesian model

A number of central banks in advanced countries use ranges, or bands, around their inflation target to formulate their monetary policy strategy. The adoption of such ranges has been proposed by some policymakers in the context of the Fed and the ECB reviews of their strategies. Using a standard New Keynesian macroeconomic model, we analyze the consequences of tolerance range policies, characterized by a stronger reaction of the central bank to inflation when inflation lies outside the range than when it is close to the target, ie the central value of the band. We show that (i) a tolerance band should not be a zone of inaction: the lack of reaction within the band endangers macroeconomic stability and leads to the possibility of multiple equilibria; (ii) the trade-off between the reaction needed outside the range versus inside seems unfavorable: a very strong reaction, when inflation is far from the target, is required to compensate a moderately lower reaction within tolerance band; (iii) these results, obtained within the framework of a stylized model, are robust to many alterations, in particular allowing for the zero lower bound.

Optimal Control Dynamic Relationships and Fiscal Policies in Indonesia’s Economy

Purpose: This study aims to estimate optimal control in the Keynesian macroeconomic model for the Indonesian economy. Approach/Methodology/Design: Researchers use optimal control in retrieval in connection with macro-econometric models' problems. One way is used to influence macroeconomic variables, which include national income and expenditure. In this study, optimal control is used on the expenditure side, namely, to influence changes in the budget deficit. The data used is secondary data in the form of time series, in the period 1990-2018. Simulation is used to obtain the optimal value, with a simulation period starting from 2019-2023 - optimal control theory through fiscal policy on the budget deficit. Findings: The results showed that the optimal value of macroeconomic variables has a deviation from the target value for all macroeconomic variables, consumption, investment, exports, imports, GDP, and budget deficits. So, it can be seen that optimal growth, through macroeconomic variables that influence it, including GDP, consumption, investment, exports, and imports with the budget deficit as a control variable. In the scientific concept, optimal control theory is used as a tool to determine an optimal policy. Practical Implication: The research provides a solution to the budget deficit problem. The government needs to control the deficit so that optimal economic growth will be obtained. The largest deviation from the average during the simulation period occurred in GDP, followed by investment, exports, and fiscal policy deficits. Meanwhile, the lowest average deviation is found in imports. Original/Value: This research contributes and provides solutions to fiscal Policy. They are mostly related to the budget deficit.

Perceived uncertainty shocks, excess optimism-pessimism, and learning in the business cycle

What are the effects of beliefs, sentiment, and uncertainty, over the business cycle? To answer this question, we develop a behavioral New Keynesian macroeconomic model, in which we relax the assumption of rational expectations. Agents are, instead, boundedly rational: they have a finite-planning horizon, and they learn about the economy over time. Moreover, we allow agents to have a potentially asymmetric loss function in forecasting, which creates a direct channel for expected variances to affect the economy. In forming expectations, agents may be subject to shifts in optimism and pessimism (sentiment) and their beliefs may be influenced by their perceptions about future uncertainty. We estimate the behavioral model using Bayesian methods and exploit a large number of subjective expectation series (both point and density forecasts) at different horizons from the Survey of Professional Forecasters. We find that sentiment shocks are the key source of business cycle fluctuations. Shifts in perceived uncertainty can also affect real activity and inflation through a confidence channel, as they play an important role in belief formation. Overall, the results shed light on the importance of behavioral forces over the business cycles, and on the contribution and interaction of first-moment - sentiment - shocks versus second-moment - perceived uncertainty - shocks.

IMPLICATIONS OF PLATFORM FINANCE ON MONETARY POLICY TRANSMISSION

The emergence of a decentralized peer-to-peer platform that matches lending and borrowing without collateral requirements has called the bank lending and balance-sheet channels for monetary transmission into question. Via a standard New Keynesian macroeconomic model expanded with two-sided platform and group identity, we put forward a novel platform density channel of monetary transmission, which could overshadow the conventional channels. An increase in policy rate, for instance, would instigate a shift toward platform borrowing. Increasing borrowers’ density attracts participation in platform deposits, which in turn further enhances borrowers’ benefit of joining the platform, making liquidity available at decreasing platform loan rates. Business investment and hence the inflation rate gets lifted despite monetary tightening. The implication of platform density channel diminishes, however, when platform borrowings complement bank borrowings, and pose nontrivial risk of default.

Long-run Relationship of Economic Growth with Consumption, Unemployment Rates and Saving Rates in Developing Countries: A Case Study of Vietnam

The Keynesian macroeconomic model implies that household expenditures and savings have significant long-run impacts on economic growth by affecting total expenditures. Therefore, policymakers should determine and apply appropriate policies to maintain these variables. For this purpose, the long-run relationship of economic growth with consumption, unemployment and saving rates in Vietnam is analyzed with the time data method using annual data for the period 1996-2017. Consumption appears to have the most impact on economic growth in accordance with the estimation results of a co-integration test from an autoregressive distributed lag model (ARDL model). In long run, an increase of 1% in consumption expenditures decreases economic growth by 0.41%. A 1% increase in saving rates increases economic growth by 0.0009%. While an increase of 1% in unemployment rates decreases economic growth by 0.043%. Our results demonstrate that there exists only long run relationship among economic growth, consumption, saving and unemployment rates for Vietnam, but not in short run.

Sectoral Output Effects of Monetary Policy: Do Sticky Prices Matter?

This paper studies the role of sticky prices for the monetary transmission mechanism, using disaggregated industry-level data from 205 US industries. There is substantial heterogeneity in the output responses of industries to monetary policy surprises. I show that an industry's response to monetary policy surprises is systematically related to an industry's degree of price stickiness as measured by the average frequency of price adjustment. The size of the differential reaction is economically large and statistically significant. The results suggest that sticky prices play an important role in the transmission of monetary policy, consistent with New Keynesian macroeconomic models. This result is robust to the inclusion of further industry-level control variables. JEL Classification: E31, E32

Perceived Uncertainty Shocks, Excess Optimism-Pessimism, and Learning in the Business Cycle

What are the effects of beliefs, sentiment, and uncertainty, over the business cycle? To answer this question, we develop a behavioral New Keynesian macroeconomic model, in which we relax the assumption of rational expectations. Agents are, instead, boundedly rational: they have a finite-planning horizon, and they learn about the economy over time. Moreover, we allow agents to have a potentially asymmetric loss function in forecasting, which creates a direct channel for expected variances to affect the economy. In forming expectations, agents may be subject to shifts in optimism and pessimism (sentiment) and their beliefs may be influenced by their perceptions about future uncertainty. We estimate the behavioral model using Bayesian methods and exploit a large number of subjective expectation series (both point and density forecasts) at different horizons from the Survey of Professional Forecasters. We find that sentiment shocks are the key source of business cycle fluctuations. Shifts in perceived uncertainty can also affect real activity and inflation through a confidence channel, as they play an important role in belief formation. Overall, the results shed light on the importance of behavioral forces over the business cycles, and on the contribution and interaction of first-moment - sentiment - shocks versus second-moment - perceived uncertainty - shocks.

ЭКОНОМЕТРИЧЕСКИЙ АНАЛИЗ КЕЙНСИАНСКОЙ МОДЕЛИ С ИСПОЛЬЗОВАНИЕМ ДАННЫХ ПО РЕСПУБЛИКЕ ИРЛАНДИЯ

The article is a summary of the research project of the applicability of the Keynesian macroeconomic model for closed economies on the actual historical data for the Republic of Ireland for forecasting purposes. Different econometric techniques and tests are used to estimate the quality of the econometric specification based on the Keynesian model, to assess adequacy of the model and relevance of the forecasting results. In the article essential quantitative indicators and subsequent conclusions are presented in order to come up with fair and unbiased estimation of the applicability of the Keynesian macroeconomic model.

Dynamic Keynesian Model of Economic Growth with Memory and Lag

A mathematical model of economic growth with fading memory and continuous distribution of delay time is suggested. This model can be considered as a generalization of the standard Keynesian macroeconomic model. To take into account the memory and gamma-distributed lag we use the Abel-type integral and integro-differential operators with the confluent hypergeometric Kummer function in the kernel. These operators allow us to propose an economic accelerator, in which the memory and lag are taken into account. The fractional differential equation, which describes the dynamics of national income in this generalized model, is suggested. The solution of this fractional differential equation is obtained in the form of series of the confluent hypergeometric Kummer functions. The asymptotic behavior of national income, which is described by this solution, is considered.

A Theoretical Framework for Law and Macroeconomics

This article considers the effects of law within a Keynesian macroeconomic model. Using the investment-savings and liquidity-money (IS/LM) model at the heart of “short-run” macroeconomics, I argue that law affects spending (“aggregate demand”) and that the changes in spending induced by law can affect output. I contrast the law and macroeconomic perspective with the law and microeconomic approach that has dominated law and economics. I demonstrate that law’s effects on aggregate demand, invariably ignored in law and economics, become particularly important when monetary policy is constrained by the “zero lower bound” (ZLB) on nominal interest rates. At the ZLB, interest rates cannot adjust to bring aggregate demand into balance with the economy’s supply potential. Economic output falls short of its potential due to inadequate demand. At the ZLB, I argue that some micro-economically disfavored legal instruments, such as command and control regulation crafted to increase spending, become appealing relative to seemingly superior alternative instruments such as Pigovian taxation. I conclude by arguing that law offers a potentially important but unexplored instrument of macroeconomic policy.

A Theoretical Framework for Law and Macroeconomics

This Article considers the effects of law within a Keynesian macroeconomic model on the economy. Using the IS/LM model at the heart of “short-run” macroeconomics, I argue that law affects spending (“aggregate demand”) and that the changes in spending induced by law can affect output. I contrast the law and macroeconomic perspective with the law and microeconomic approach that has dominated law and economics. I demonstrate that law’s effects on aggregate demand become particularly important when monetary policy is constrained by the “zero lower bound” on nominal interest rates. At the zero lower bound, interest rates cannot adjust to bring aggregate demand into balance with the economy’s supply potential. Economic output falls short of its potential due to inadequate demand. At the zero lower bound, I argue that some micro-economically disfavored legal instruments, such as command and control regulation crafted to increase spending, become appealing relative to seemingly superior alternative instruments such as Pigovian taxation.

The Role of Remittance-Induced Credit Expansion in a Short-Run Keynesian Macroeconomic Model

This paper introduces a remittance-induced credit expansion in a static Keynesian macroeconomic model. A credit expansion in the monetary sector results in lowering the equilibrium level of interest rates, which in turn stimulates interest-sensitive consumption and investment. Secondly, the paper introduces a direct effect of remittances on investment. With the two extensions in a static Keynesian model of remittances, the paper derives the equilibrium level of national income and shows the effects of interactions of remittances with the monetary sector on national income. The results of the paper are illustrated numerically.

Some Implications of Uncertainty and Misperception for Monetary Policy

When choosing a strategy for monetary policy, policymakers must grapple with mismeasurement of labor market slack, and of the responsiveness of price inflation to that slack. Using stochastic simulations of a small-scale version of the Federal Reserve Board’s principal New Keynesian macroeconomic model, we evaluate representative rule-based policy strategies, paying particular attention to how those strategies interact with initial conditions in the U.S. as they are seen today and with the current outlook. To do this, we construct a current relevant baseline forecast, one that is loosely constructed based on a recent FOMC forecast, and conduct our experiments around that baseline. We find the initial conditions and forecast that policymakers face affects decisions in a material way. The standard advice from the literature, that in the presence of mismeasurement of resource slack policymakers should substantially reduce the weight attached to those measures in setting the policy rate, and substitute toward a more forceful response to inflation, is overstated. We find that a notable response to the unemployment gap is typically beneficial, even if that gap is mismeasured. Even when the dynamics of inflation are governed by a 1970s-style Phillips curve, meaningful response to resource utilization is likely to turn out to be worthwhile, particularly in environments where resource utilization is thought to be tight to begin with and inflation is close to its target level.

Behavioural Economics is Useful Also in Macroeconomics: The Role of Animal Spirits

Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries.

Quasi-Bayesian model selection

In this paper, we establish the consistency of the model selection criterion based on the quasi‐marginal likelihood (QML) obtained from Laplace‐type estimators. We consider cases in which parameters are strongly identified, weakly identified and partially identified. Our Monte Carlo results confirm our consistency results. Our proposed procedure is applied to select among New Keynesian macroeconomic models using US data. Impulse response function matching Laplace‐type estimators quasi‐marginal likelihood C11 C32 C52

Is optimal Islamic financial contract stabilizing? The perspective of a New Keynesian model with the financial accelerator

This paper aims to inspect the stabilization aspects of Islamic financial contracts by drawing on a New Keynesian macroeconomic model with the financial accelerator. The model allows for shared responsibilities on both the assets and liabilities sides of the Islamic banks that resemble, in principle, the two-tiered Mudarabah financing on the asset side and profit-sharing investment accounts on the liability side. The implied optimal Islamic financial contract argues that payoff distribution between entrepreneur and bank is contingent on the macroeconomic environment via the entrepreneur's leverage, whereas that between bank and investors is endogenous to bank's capital and leverage. Compared to the conventional debt contract with a predetermined return, we find that an Islamic financial contract amplifies shocks as much as conventional financial contracts do, if not to a greater extent. The impacts on entrepreneurs' and banks' leverage, however, depend largely on the source of the shock and are opposite to those observed under conventional debt contract. Whereas favorable aggregate supply and monetary shocks increase the overall leverage, shocks favorably hitting preference and marginal efficiency of investment reduce the leverage. The underlying mechanism is the shock-shifting ex post payoff distribution between creditors and debtors that shapes the cost of the external finance and, thus, leverage.

An auxiliary particle filter for nonlinear dynamic equilibrium models

We develop a particle filter algorithm to approximate the likelihood function of nonlinear dynamic stochastic general equilibrium models. The new algorithm reduces the Monte Carlo variance of likelihood approximation and accelerates the convergence of posterior sampler. It requires much fewer particles to achieve comparable results as currently available particle filters. We illustrate our algorithm in Bayesian estimation of a new Keynesian macroeconomic model.