Working Paper: NBER ID: w24612
Authors: Lawrence Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen
Abstract: This paper addresses whether non-uniqueness of equilibrium is a substantive problem for the analysis of fiscal policy in New-Keynesian (NK) models at the zero lower bound (ZLB). There would be a substantive problem if there were no compelling way to select among different equilibria that give different answers to critical policy questions. We argue that learnability provides such a criterion. We study a fully non-linear NK model with Calvo pricing frictions. Our main finding is that the model we analyze has a unique E-stable rational expectations equilibrium at the ZLB. That equilibrium is also stable-under-learning and inherits all of the key properties of linearized NK models for fiscal policy.
Keywords: New Keynesian model; fiscal policy; zero lower bound; learnability; equilibrium
JEL Codes: E0; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government consumption (H59) | Economic output (E23) |
| Unique stable equilibrium at the ZLB (C62) | Stability under learning (C62) |
| ZLB fiscal multiplier (E62) | Economic output (E23) |
| Nonuniqueness of equilibria (D59) | Analysis of fiscal policy (E62) |
| Fiscal policy implications (E62) | Unique stable equilibrium at the ZLB (C62) |
| Government spending (H59) | Economic output (E23) |