Citation

Discussion Paper Details

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Title: The New Keynesian Cross

Author(s): Florin Ovidiu Bilbiie

Publication Date: April 2017

Keyword(s): hand-to-mouth and hand-to-mouth; heterogenous agents; aggregate demand; optimal monetary policy; liquidity trap; Keynesian cross; forward guidance

Programme Area(s): Monetary Economics and Fluctuations

Abstract: The New Keynesian (NK) Cross is a graphical and analytical apparatus for heterogeneous-agent (HANK) models expressing key aggregate demand objects - MPC and multipliers - as functions of heterogeneity parameters. It affords analytical insights into monetary, fiscal, and forward guidance multipliers, and replicates the aggregate implications of quantitative HANK. The key parameter - the constrained agents - income elasticity to aggregate income - depends on fiscal redistribution: when it is larger (smaller) than one, the effects of policies and shocks are amplified (dampened). With uninsurable idiosyncratic uncertainty, this translates intertemporally - through compounding (discounting) in the aggregate Euler equation - into further amplification (dampening) of future shocks.

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Bibliographic Reference

Bilbiie, F. 2017. 'The New Keynesian Cross'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11989