Publications
Log-linear Approximation versus an Exact Solution at the ZLB in the New Keynesian Model (with Gauti Eggertsson)
Forthcoming at Journal of Economic Dynamics and Control
August 2018
Abstract: How accurate is a log-linear approximation of the New Keynesian model when the nominal interest rate is bounded by zero? This paper compares the solution of the exact non-linear model to the log-linear approximation. It finds that the difference is modest. This applies even for extreme events in numerical experiments that replicate the U.S. Great Depression. The exact non-linear model makes the same predictions as the log-linear approximation for key policy questions such as the size and sign of government spending and tax multipliers. It also replicates well known paradoxes like the paradox of toil and the paradox of price flexibility. The paper also reconciles different findings reported in the literature using Calvo versus Rotemberg pricing.
NBER Working Paper no. 22784
A Contagious Malady? Open Economy Dimensions of Secular Stagnation (with Gauti B. Eggertsson, Neil R. Mehrotra, and Lawrence H. Summers)
IMF Economic Review, Vol. 64(4), pp. 581-634
December 2016
Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neo-mercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
Here's a VoxEU summary of the paper written by Gauti Eggertsson and Lawrence Summers. NBER Working Paper no. 22299.
Policy Citations:
Jason Furman, Chairman of the Council of Economic Advisers (October 5, 2016, August 2, 2016)
Simon Potter, Executive Vice-President of the Federal Reserve Bank of New York (September 30, 2016)
Vítor Constâncio, Vice-President of the European Central Bank (April 13, 2016)
Press Coverage:
Washington Post (July 7, 2016)
Paul Krugman's Blog (June 20, 2016)
Economist's View (June 7, 2016)
Log-linear Approximation versus an Exact Solution at the ZLB in the New Keynesian Model (with Gauti Eggertsson)
Forthcoming at Journal of Economic Dynamics and Control
August 2018
Abstract: How accurate is a log-linear approximation of the New Keynesian model when the nominal interest rate is bounded by zero? This paper compares the solution of the exact non-linear model to the log-linear approximation. It finds that the difference is modest. This applies even for extreme events in numerical experiments that replicate the U.S. Great Depression. The exact non-linear model makes the same predictions as the log-linear approximation for key policy questions such as the size and sign of government spending and tax multipliers. It also replicates well known paradoxes like the paradox of toil and the paradox of price flexibility. The paper also reconciles different findings reported in the literature using Calvo versus Rotemberg pricing.
NBER Working Paper no. 22784
A Contagious Malady? Open Economy Dimensions of Secular Stagnation (with Gauti B. Eggertsson, Neil R. Mehrotra, and Lawrence H. Summers)
IMF Economic Review, Vol. 64(4), pp. 581-634
December 2016
Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neo-mercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
Here's a VoxEU summary of the paper written by Gauti Eggertsson and Lawrence Summers. NBER Working Paper no. 22299.
Policy Citations:
Jason Furman, Chairman of the Council of Economic Advisers (October 5, 2016, August 2, 2016)
Simon Potter, Executive Vice-President of the Federal Reserve Bank of New York (September 30, 2016)
Vítor Constâncio, Vice-President of the European Central Bank (April 13, 2016)
Press Coverage:
Washington Post (July 7, 2016)
Paul Krugman's Blog (June 20, 2016)
Economist's View (June 7, 2016)