Working Paper: NBER ID: w14824
Authors: Pierpaolo Benigno
Abstract: A simple New-Keynesian model is set out with AS-AD graphical analysis. The model is consistent with modern central banking, which targets shortterm nominal interest rates instead of money supply aggregates. This simple framework enables us to analyze the economic impact of productivity or markup disturbances and to study alternative monetary and fiscal policies. \n\nThe framework is also suitable for studying a liquidity-trap environment, the economics of debt deleveraging, and possible solutions. \n\nThe impact of the fiscal multipliers on output and the output gap can be quantified. During normal times, a short-run increase in public spending has a multiplier less than one on output and a much smaller multiplier on the output gap, while a decrease in short-run taxes has a positive multiplier on output, but negative on the output gap. When the economy is depressed because some agents are deleveraging, fiscal policy is more powerful and the multiplier can be quite big. \n\nIn the AS-AD graphical view, optimal policy simplifies to nothing more than an additional line, IT, along which the trade-off between the objective of price stability and that of stabilizing the output gap can be optimally exploited.
Keywords: New Keynesian Economics; Fiscal Policy; Monetary Policy; Productivity Disturbances; Markup Disturbances
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-run increase in public spending (E62) | output (C67) |
| short-run increase in public spending (E62) | output gap (E23) |
| decrease in short-run taxes (H29) | output (C67) |
| decrease in short-run taxes (H29) | output gap (E23) |
| economic environment (P42) | effectiveness of fiscal policy (E62) |
| monetary policy actions (E52) | consumption-saving decisions (E21) |