DP11989 The New Keynesian Cross

Author(s): Florin Ovidiu Bilbiie
Publication Date: April 2017
Date Revised: August 2018
Keyword(s): hand-to-mouth, hand-to-mouth; heterogenous agents; aggregate demand; optimal monetary policy; liquidity trap; Keynesian cross; forward guidance
JEL(s): E21, E31, E40, E44, E50, E52, E58, E60, E62
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11989

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.