Macroeconomics II: Introduction to New-Keynesian

Models

Dániel Baksa

ELTEcon

ELTEcon
 Macroeconomics II
Outline
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
model
Households problem
Stylized facts? Firms problem
Aggregate levels

Building blocks of New-Keynesian models Equations of the

model

Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

2
 Macroeconomics II
US data...
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
GDP: log and HP-filter model
Households problem

CPI: YoY changes with 2% (implicit) inflation target Firms problem

Aggregate levels
Equations of the
Nominal interest rate: FED rate with different regimes model

Log-linearization
Money supply: M1 Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

3
 Macroeconomics II
Data
Dániel Baksa

USA GDP (100*log, %) USA GDP cycle HP filter (%)

970 4
Teljes Introduction
960
Trend 2

950 Stylized facts

0
940 New-Keynesian
model
-2
930 Households problem
Firms problem
920 -4 Aggregate levels
1995:1 2000:1 2005:1 2010:1 1995:1 2000:1 2005:1 2010:1 Equations of the
model

USA CPI (%, YoY) USA FED rate (%) Log-linearization

6 8 Simple equations
CPI Interest rate New-Keynesian
Phillips-curve
4 Target 6 Trend
New-Keynesian
2 4 model

Impulse Response
0 2
Functions

-2 0
1995:1 2000:1 2005:1 2010:1 1995:1 2000:1 2005:1 2010:1

4
 Macroeconomics II
Monetary base and CPI ...
Dániel Baksa

US M1 and CPI gap (%, YoY)

20 5

4 Introduction
15
Stylized facts
3

10 New-Keynesian
2
model
Households problem
5 Firms problem

CPI (%, YoY)

M1 (%, YoY)

1
Aggregate levels
Equations of the
0 0 model

Log-linearization
-1
Simple equations
-5
New-Keynesian
Phillips-curve
-2

-10 New-Keynesian
-3 model

-15 Impulse Response

-4
Functions

-20 -5
1995:1 1997:1 1999:1 2001:1 2003:1 2005:1 2007:1 2009:1 2011:1 2013:1

5
 Macroeconomics II
Main stylized facts:
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
model
Households problem
Firms problem
3 main shocks we want to explain Aggregate levels
Equations of the
model

Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

6
 Macroeconomics II
Output gap and inflation gap
Dániel Baksa

Output gap and CPI gap

4 4

Introduction
3 3
Stylized facts

2 2 New-Keynesian
model
Households problem
Output gap (%)

1 1 Firms problem

CPI (%, YoY)

Aggregate levels
Equations of the
0 0 model

Log-linearization
Simple equations
-1 -1
New-Keynesian
Phillips-curve

-2 -2 New-Keynesian
model

-3 -3 Impulse Response
Functions

-4 -4
1995:1 1997:1 1999:1 2001:1 2003:1 2005:1 2007:1 2009:1 2011:1 2013:1

7
 Macroeconomics II
Output gap and interest rate
Dániel Baksa

Output gap and FED real interest rate

4 4

Introduction
3 3
Stylized facts

2 2 New-Keynesian

FED real interest rate (%)

model
Households problem
Output gap (%)

1 1 Firms problem
Aggregate levels
Equations of the
0 0 model

Log-linearization
Simple equations
-1 -1
New-Keynesian
Phillips-curve

-2 -2 New-Keynesian
model

-3 -3 Impulse Response
Functions

-4 -4
1995:1 1997:1 1999:1 2001:1 2003:1 2005:1 2007:1 2009:1 2011:1 2013:1

8
 Macroeconomics II
So far...
Dániel Baksa

Introduction

Stylized facts

1 Comovements: New-Keynesian
model
Between output gap and inflation Households problem
Firms problem
Monetary policy reacts to output gap and vica versa Aggregate levels
Equations of the
2 Speed of adjustment? model

Log-linearization
Slow accommodation ... Simple equations
... persistent changes New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

9
 Macroeconomics II

Dániel Baksa

Introduction

Stylized facts

New-Keynesian
model
Today: new model for these facts Households problem
Firms problem
Aggregate levels
Equations of the
model

Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

10
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction
Utility maximizing:
Stylized facts

∞
( )
L1+η
New-Keynesian
X Ct1−σ model
Ut = E0 β t−1 (1 + ξtC ) − (1 + ξtL ) t , Households problem
1−σ 1+η Firms problem
t=1 Aggregate levels
Equations of the
model
Budget constraint with nominal variables: Log-linearization
Simple equations
Z 1 New-Keynesian
Phillips-curve
Wt Lt + (1 + it−1 )Bt−1 + Profit(i)di = Pt Ct + Bt , New-Keynesian
0 model

Impulse Response
Functions

11
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction

Bellman-equation: Stylized facts

New-Keynesian
model
( ) Households problem
Ct1−σ L1+η Firms problem
V (Bt−1 ) = (1 +ξtC ) − (1 + ξtL ) t + βEt V (Bt ) Aggregate levels
1−σ 1+η Equations of the
model
 Z 1  Log-linearization
+λt Wt Lt + (1 + it−1 )Bt−1 + profit(i)di − Pt Ct − Bt Simple equations
New-Keynesian
0 Phillips-curve

New-Keynesian
model

Impulse Response
Functions

12
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction
FOCs:
Stylized facts

New-Keynesian
model
∂V Households problem
= (1 + ξtC )Ct−σ − λt Pt = 0 Firms problem
∂Ct Aggregate levels
Equations of the
∂V model

= −(1 + ξtC )(1 + ξtL )Lηt + λt Wt = 0 Log-linearization

∂Lt Simple equations
New-Keynesian
∂V Phillips-curve
= βEt VBt+1 − λt = 0 New-Keynesian
∂Bt model

Impulse Response
Functions

13
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction
Envelope theorem: Stylized facts

New-Keynesian
model
Households problem
VBt−1 = λt (1 + it−1 ) Firms problem
Aggregate levels
Equations of the
model
Stepping ahead
Log-linearization
Simple equations
New-Keynesian
Phillips-curve

Et VBt = Et λt+1 (1 + it ) New-Keynesian

model

Impulse Response
Functions

14
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction

Stylized facts
Then the solutions are
New-Keynesian
model
Households problem
Wt −σ Firms problem

(1 + ξtL )Lηt = C Aggregate levels

Pt t Equations of the
model
−σ C
Ct+1 1 + ξt+1 Pt Log-linearization
βEt (1 + it ) = 1 Simple equations

Ct−σ 1 + ξtC Pt+1 New-Keynesian

Phillips-curve

New-Keynesian
model

Impulse Response
Functions

15
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction

Stylized facts

Decomposition of consumption basket: New-Keynesian

model
Households problem
Firms problem
Aggregate levels
θ
Z 1 θ−1
 θ−1 Equations of the
model
Ct = Ct (i) θ di Log-linearization
0 Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

16
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
model
  Households problem
θ Firms problem
Z 1 θ−1
 θ−1
Aggregate levels
L = Pt (i)Ct (i) + γt Ct − Ct (i) θ di  Equations of the
model
0 Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

17
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction
FOC:
Stylized facts

New-Keynesian
model
∂L θ 1 1 − θ 1 Households problem
= Pt (i) − γt Ctθ Ct (i)− θ = 0 Firms problem
∂Ct (i) 1−θ θ Aggregate levels
Equations of the
model

Log-linearization
 −θ Simple equations

Pt (i) New-Keynesian
Phillips-curve
Ct (i) = Ct
γt New-Keynesian
model

Impulse Response
Functions

18
 Macroeconomics II
Households’ problem
Dániel Baksa

Plugging back the demand function:

Introduction
θ
Z 1  θ−1 Stylized facts
θ−1
Ct = Ct (i) θ di New-Keynesian
model
0 Households problem
θ Firms problem
 ! θ−1  θ−1
Pt (i) −θ
Aggregate levels
Z 1 
 θ
Equations of the
Ct =  Ct di  model

0 γt Log-linearization
Simple equations
New-Keynesian
Pt (i) 1−θ
Z 1  Phillips-curve

1 = di New-Keynesian
0 γt model

Z 1 1
 1−θ Impulse Response
Functions
1−θ
γt = Pt (i) di
0

19
 Macroeconomics II
Households’ problem
Dániel Baksa

Introduction

Stylized facts

So the Lagrange multiplier is the aggregate price index: New-Keynesian

model
Households problem
Firms problem
1 Aggregate levels
Z 1  1−θ Equations of the
model
1−θ
Pt = Pt (i) di Log-linearization
0 Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

20
 Macroeconomics II
Households’ problem
Dániel Baksa

All expenditures can be expressed with aggregate variables:

Z 1 Z 1  −θ Introduction
Pt (i)
Pt (i)Ct (i)di = Pt (i) Ct di Stylized facts
0 0 Pt
Z 1  −θ New-Keynesian
Pt (i) model
= Pt (i) diCt
0 Pt Households problem
Firms problem
1
Pt (i)1−θ
Z Aggregate levels
= diCt Equations of the
Pt−θ
model
0
R1 Log-linearization
0
Pt (i)1−θ di Simple equations
= Ct New-Keynesian
Pt−θ Phillips-curve

1−θ New-Keynesian
Pt model
= Ct
Pt−θ Impulse Response
Functions
= Pt C t

21
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
Assuming a simple constant return to scale production model
Households problem
function: Firms problem
Aggregate levels
Equations of the
model
Yt (i) = At Lt (i), Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

22
 Macroeconomics II
Firms problem
Dániel Baksa

All firms produce an own product and have market power to Introduction
set its price according to the profit maximum. Stylized facts

New-Keynesian
model
 −θ Households problem
Pt (i) Firms problem
Ct (i) = Ct Aggregate levels
Pt Equations of the
model

Log-linearization
Each market should be in equilibrium: Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model
Yt (i) = Ct (i) Impulse Response
Functions

23
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
model
Profit maximization: Households problem
Firms problem
Aggregate levels
Profitt (i) = Pt (i)Yt (i) − Wt Lt (i) Equations of the
model

Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

24
 Macroeconomics II
Firms problem
Dániel Baksa

Calvo pricing: these firms are not able to set their price in
Introduction
each period, only 1 − ω fraction can do it. So one firm
Stylized facts
should take into the ω probability that will not be able to
change its price in the next period. The ω follows uniform New-Keynesian
model
distribution. Households problem
Firms problem

Profitt+1 (i)(Pt∗ (i))

Aggregate levels

Profitt (i)(Pt∗ (i)) + Et ω

Equations of the
+ model
1 + it Log-linearization
Profitt+2 (i)(Pt∗ (i)) Simple equations
+Et ω 2 + ... New-Keynesian
(1 + it )(1 + it+1 ) Phillips-curve

New-Keynesian
Profitt+n (i)(Pt∗ (i)) model
+Et ω n −→ max
(1 + it ) · ... · (1 + it+n ) Pt∗ (i) Impulse Response
Functions

25
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts

So the optimization: New-Keynesian

model
Households problem
Firms problem
Aggregate levels
∞
X Profitt+n (i)(Pt∗ (i)) Equations of the
Et ω n Q n −→ max model

k=1 1 + it+k−1 Pt∗ (i) Log-linearization

n=0 Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

26
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts
The discount factor can be written as
New-Keynesian
model
Households problem
1 Firms problem
Et ∆t,t+n = Et Aggregate levels

(1 + it ) · ... · (1 + it+n ) Equations of the

model

C −σ Pt Log-linearization
Et ∆t,t+n = Et β n t+n Simple equations

Ct−σ Pt+n New-Keynesian

Phillips-curve

New-Keynesian
model

Impulse Response
Functions

27
 Macroeconomics II
Firms problem
Dániel Baksa

The full optimization: Introduction

Stylized facts
∞
New-Keynesian
X
Et ω n
∆t,t+n (Pt∗ (i)Yt+n (i) − Wt+n Lt+n (i)) −→ max
∗
model
Pt (i) Households problem
n=0 Firms problem
Aggregate levels
Equations of the
We can plug in the production function: model

Log-linearization
Simple equations
New-Keynesian
∞   Phillips-curve
X Yt+n (i)
Et ω n ∆t,t+n Pt∗ (i)Yt+n (i) − Wt+n −→ max New-Keynesian
At+n ∗
Pt (i) model
n=0
Impulse Response
Functions

28
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction
And the marginal cost: Stylized facts

New-Keynesian
Wt model
MCt =
At Households problem
Firms problem
Aggregate levels
Equations of the
The optimization in more general way: model

Log-linearization
∞
X Simple equations
n
∆t,t+n (Pt∗ (i)Yt+n (i)
New-Keynesian
Et ω − MCt+n Yt+n (i)) −→ max
∗
Phillips-curve
Pt (i) New-Keynesian
n=0 model

Impulse Response
Functions

29
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts

Monopolistic competition, then we can plug the demand into New-Keynesian

model
the optimization: Households problem
Firms problem
∞ Aggregate levels
−θ −θ !
Pt∗ (i) Pt∗ (i)
 
Equations of the
X
Et ω n ∆t,t+n Pt∗ (i) Ct+n − MCt+n Ct+n −→ max
model

n=0
Pt+n Pt+n Pt∗ (i)
Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

30
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts
FOC: New-Keynesian
!−θ !−θ−1 model
∞
X n Pt∗ (i) ∗ Pt∗ (i) 1 Households problem
Et ω ∆t,t+n Ct+n − θPt (i) Ct+n + Firms problem
n=0 Pt+n Pt+n Pt+n Aggregate levels
!−θ−1 Equations of the
Pt∗ (i)
!
1 model
+θMCt+n Ct+n =0
Pt+n Pt+n Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

31
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
Rearranging: model
Households problem
Firms problem
∞
!−θ ∞
!−θ Aggregate levels
X n Pt∗ (i) ∗
X n Pt∗ (i) Equations of the
θEt ω ∆t,t+n MCt+n Ct+n = (θ − 1)Pt (i)Et ω ∆t,t+n Ct+n
Pt+n Pt+n model
n=0 n=0
Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

32
 Macroeconomics II
Firms problem
Dániel Baksa

Introduction

Stylized facts
Express Pt∗ (i): New-Keynesian
model
Households problem
 −θ Firms problem
P∞ n∆ 1 Aggregate levels

θ n=0 ω t,t+n MCt+n Pt+n Ct+n Equations of the

Pt∗ (i)
model
= Et −θ
θ−1 Log-linearization
P∞ 
n 1
n=0 ω ∆t,t+n Ct+n Simple equations
Pt+n New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

33
 Macroeconomics II
Firms problem
Dániel Baksa

If each firm was able to set the optimal price, the optimal
price would be the following: Introduction

Stylized facts

New-Keynesian
θ model
Pt∗ (i) = MCt Households problem
θ−1 Firms problem
Aggregate levels
Equations of the
The optimal price is function of marginal cost and markup. model

Log-linearization
The markup depends on the competition and substitution of Simple equations

different products. If θ is high, then the markup is lower: New-Keynesian

Phillips-curve

New-Keynesian
model

θ Impulse Response
Pt = MCt Functions
θ−1

34
 Macroeconomics II
Aggregate levels
Dániel Baksa

Aggregate labor supply:

Z i Introduction

Lt = Lt (i)di Stylized facts

0 New-Keynesian
model
And production function: Households problem
Firms problem
Aggregate levels
Equations of the
model

Yt (i) Log-linearization
Lt (i) = Simple equations
At New-Keynesian
Phillips-curve

New-Keynesian
Then the aggregate labor: model

Impulse Response
Functions
Z 1
Yt (i)
Lt = di
0 At

35
 Macroeconomics II
Aggregate levels
Dániel Baksa

Plugging the each demands:

Introduction

 −θ Stylized facts

Pt (i)
Z 1
Pt Ct New-Keynesian
model
Lt = di Households problem
0 At Firms problem
Aggregate levels
Equations of the
Rearranging: model

Log-linearization
Simple equations
New-Keynesian
Z 1 −θ Phillips-curve
Ct Pt (i) New-Keynesian
Lt = di model
At 0 Pt
Impulse Response
Functions
R 1  Pt (i) −θ
What is 0 Pt di?

36
 Macroeconomics II
Aggregate levels
Dániel Baksa

Aggregate price index:

Introduction

Stylized facts
1
Z 1  1−θ New-Keynesian
model
Pt = Pt (i)1−θ di Households problem
0 Firms problem
Aggregate levels
Equations of the
model

We want to show: Log-linearization

Simple equations
New-Keynesian
Phillips-curve

1 New-Keynesian
 Z ω 
1−θ model
Pt = (1 − ω)Pt∗ (i)1−θ +ω Pt−1 (i) 1−θ
di Impulse Response
0 Functions

37
 Macroeconomics II
Aggregate levels
Dániel Baksa

R1
What is (1 − ω) 1−ω Pt−1 (i)1−θ di?
Introduction

1 Stylized facts
Z 1  1−θ
1−θ New-Keynesian
Pt = Pt (i) di model
0 Households problem
Firms problem
! 1
Aggregate levels
Pt (i) 1−θ
1 1−θ
Z 
Equations of the
1 = di model

0 Pt Log-linearization
Simple equations

Pt (i) 1−θ
Z 1  New-Keynesian
Phillips-curve
1 = di New-Keynesian
0 Pt model
Z 1
Impulse Response
1 = e (1−θ)(ln Pt (i)−ln Pt ) di Functions
0

38
 Macroeconomics II
Aggregate levels
Dániel Baksa

Second order approximation

Introduction
(1 − θ)2
Z 1
2
1 ≈ 1 + (1 − θ)(ln Pt (i) − ln Pt ) + (ln Pt (i) − ln Pt ) di Stylized facts
0 2
(1 − θ)2
Z 1 Z 1 Z 1
2 New-Keynesian
1 ≈ 1di + (1 − θ) (ln Pt (i) − ln Pt )di + (ln Pt (i) − ln Pt ) di model
0 0 2 0
Households problem
(1 − θ)
Z 1 Z 1
2 Firms problem
ln Pt ≈ ln Pt (i)di + (ln Pt (i) − ln Pt ) di
0 2 0 Aggregate levels
Equations of the
model

Log-linearization
Individual prices deviates
R 1 from the aggregate price index with
Simple equations
New-Keynesian
a fixed standard error( 0 (ln Pt (i) − ln Pt )2 di): Phillips-curve

New-Keynesian
model

Impulse Response
1 1
(1 − θ)
Z Z
Functions
2
ln Pt (i)di ≈ ln Pt − (ln Pt (i) − ln Pt ) di
0 2 0

39
 Macroeconomics II
Aggregate levels
Dániel Baksa

Introduction

Stylized facts
Law of large numbers, the previous individual price converges New-Keynesian
model
to previous price index: Households problem
Firms problem
Aggregate levels
Equations of the
1 model
 
(1 − ω)Pt∗ (i)1−θ + ωPt−1
1−θ 1−θ
Pt = Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

40
 Macroeconomics II
Equations of the model
Dániel Baksa

9 unknown: C , i, π, L, w , P, P ∗ , MC , W . And 8 equations:

−σ C Introduction
Ct+1 1 + ξt+1 1 + it
βEt = 1
Ct−σ 1 + ξtC 1 + πt+1 Stylized facts
L η −σ
(1 + ξt )Lt = wt C t New-Keynesian
model
Pt (i) −θ
Z 1
Ct

Lt = di Households problem
At 0 Pt Firms problem
  1 Aggregate levels
∗ 1−θ 1−θ
Pt = (1 − ω)Pt (i) + ωPt−1 1−θ Equations of the
model
P∞  −θ
θ ω n ∆t,t+n MCt+n P 1
n=0 Ct+n Log-linearization
∗ t+n
Pt (i) = Et   −θ Simple equations
θ−1 P∞ n 1
n=0 ω ∆t,t+n P t+n
Ct+n New-Keynesian
Phillips-curve
Wt
MCt = New-Keynesian
At model
Wt
wt = Impulse Response
Pt Functions
Pt
1 + πt =
Pt−1

41
 Macroeconomics II
Equations of the model
Dániel Baksa

Introduction

Stylized facts

Assuming an additional equation for monetary policy: Taylor New-Keynesian

model
rule Households problem
Firms problem
Aggregate levels
Equations of the
model

1 + it = (1 + i)(1 + πt )φπ (1 + ξti ) Log-linearization

Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

42
 Macroeconomics II
Equations of the model
Dániel Baksa

−σ C
Ct+1 1 + ξt+1 1 + it
βEt = 1
Ct−σ 1 + ξtC 1 + πt+1 Introduction
L η −σ
(1 + ξt )Lt = wt C t Stylized facts
Pt (i) −θ
Z 1
Ct

New-Keynesian
Lt = di model
At 0 Pt
  1 Households problem
!1−θ Firms problem
Pt∗ (i) 1−θ
1−θ
Pt−1

1 = (1 − ω) +ω  Aggregate levels
Pt Pt Equations of the
model
P
 −θ
P∞ P
Pt∗ (i) θ n=0 ω n ∆t,t+n t+n
Pt
mct+n P t Ct+n Log-linearization
t+n
= Et  −θ Simple equations
Pt θ−1 P∞ n Pt
n=0 ω ∆t,t+n P Ct+n
t+n
New-Keynesian
Phillips-curve
wt
mct = New-Keynesian
At
model
Pt
1 + πt = Impulse Response
Pt−1
Functions
φπ i
1 + it = (1 + i)(1 + πt ) (1 + ξt )

43
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Euler equation:
Introduction
C C
ln β − σEt ln Ct+1 + σ ln Ct + ln(1 + ξt+1 ) − ln(1 + ξt ) + ln(1 + it ) − Et ln(1 + πt+1 ) = 0
Stylized facts

New-Keynesian
model
Households problem
Assuming zero inflation in steady-state: Firms problem
Aggregate levels
Equations of the
model
C C
−σEt C
[ t+1 + σ Ct + ξt+1 − ξt + it − Et πt+1 = 0
c b
Log-linearization
Simple equations
New-Keynesian
Some rearranging: Phillips-curve

New-Keynesian
model
1 C C
 1 
C [
ct = Et C t+1 + ξt − ξt+1 − ibt − Et πt+1 Impulse Response
σ σ Functions

44
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Introduction

Stylized facts
Labor supply curve:
New-Keynesian
model
ln(1 + ξtL ) + η ln Lt + σ ln Ct = ln wt Households problem
Firms problem
Aggregate levels
Equations of the
And model

Log-linearization
Simple equations
ξtL + η Lbt + σ C
ct = w
ct New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

45
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Introduction

Stylized facts
Marginal cost:
New-Keynesian
model
ln mct = ln wt − ln At Households problem
Firms problem
Aggregate levels
Equations of the
And model

Log-linearization
Simple equations
m
d ct − A
ct = w ct New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

46
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Introduction

Stylized facts

Taylor rule: New-Keynesian

model
Households problem
1 + it = (1 + i)(1 + πt )φπ (1 + ξti ) Firms problem
Aggregate levels

ln(1 + it ) = ln(1 + i) + φπ ln(1 + πt ) + ln(1 + ξti )

Equations of the
model

Log-linearization
ibt = φπ πt + ξti Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

47
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Introduction

Stylized facts
Aggregate labor demand: New-Keynesian
model
Z 1 −θ Households problem
Pt (i) Firms problem
ln Lt = ln Ct − ln At + ln di Aggregate levels

0 Pt Equations of the
model

Log-linearization
R 1  Pt (i) −θ Simple equations
We need to show ln 0 Pt di is constant. New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

48
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Introduction
Second order approximation: Stylized facts

New-Keynesian
−θ model
Z 1  Z 1
Pt (i)
e −θ(ln Pt (i)−ln Pt ) di
Households problem
di = Firms problem
0 Pt 0 Aggregate levels
1 Equations of the
θ2
Z
model
≈ (ln Pt (i) − ln Pt )2 di
1 − θ(ln Pt (i) − ln Pt ) +
0 2 Log-linearization
Z 1 Z 1 Z 1 2 Simple equations
θ New-Keynesian
≈ 1di − θ(ln Pt (i) − ln Pt )di + (ln Pt (i) − ln Pt )2 di Phillips-curve
0 0 0 2 New-Keynesian
model

Impulse Response
Functions

49
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Using the previous derivations Introduction

Stylized facts
(1 − θ)
Z 1 Z 1
2
(−1) (ln Pt (i) − ln Pt )di ≈ (ln Pt (i) − ln Pt ) di New-Keynesian
0 2 0 model
Households problem
Firms problem
Aggregate levels

And we got Equations of the

model

Log-linearization
Simple equations
Pt (i) −θ (1 − θ) θ2
Z 1  Z 1 Z 1
2 2 New-Keynesian
di ≈ 1+θ (ln Pt (i) − ln Pt ) di + (ln Pt (i) − ln Pt ) di Phillips-curve
0 Pt 2 0 2 0

Pt (i) −θ New-Keynesian
Z 1 Z 1
θ

2
di ≈ 1+ (ln Pt (i) − ln Pt ) di model
0 Pt 2 0
Impulse Response
Functions

50
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Introduction

Stylized facts

So that terms is is function of fixed standard error: New-Keynesian

model
Households problem
Firms problem
−θ Aggregate levels
Z 1  
Pt (i) θ Pt (i) Equations of the
model
ln di ≈ var
0 Pt 2 Pt Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

51
 Macroeconomics II
Log-linearization: Simple equation
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
The aggregate labor demand: model
Households problem
Firms problem
Aggregate levels
Equations of the
model
ct − A
Lbt = C ct
Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

52
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts

We have this ugly equation: New-Keynesian

model
 −θ Households problem
P∞ Pt+n Pt Firms problem

Pt∗ (i) θ n=0 ωn ∆ t,t+n Pt mct+n Pt+n Ct+n Aggregate levels

Equations of the
= Et −θ model
Pt θ−1 P∞ 
n∆ Pt
n=0 ω Ct+n Log-linearization
t,t+n Pt+n Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

53
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
Rearranging model
Households problem
Firms problem
∞ −θ Aggregate levels
Pt∗ (i)
  
X Pt θ Pt+n Equations of the
Et ω n ∆t,t+n Ct+n − mct+n =0 model

n=0
Pt+n Pt θ − 1 Pt Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

54
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction
Think it over Stylized facts
 −θ New-Keynesian
∞ ln ω k +ln ∆ Pt
t,t+n +ln P +ln Ct+n ln Pt∗ (i)−ln Pt θ
 
X
t+n ln mct+n +ln Pt+n −ln Pt model
Et e e − e =0
θ−1 Households problem
n=0
Firms problem
Aggregate levels
Equations of the
Discount factor: model

Log-linearization
Et ln ∆t,t+n = ln β n − σEt ln Ct+n + σ ln Ct + ln Pt − Et ln Pt+n Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

55
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts
∞  
X
ln Pt∗ (i)−ln Pt θ
n n
e ln mct+n +ln Pt+n −ln Pt
New-Keynesian
Et ω β C e − =0 model
θ−1 Households problem
n=0 Firms problem
Aggregate levels
Equations of the
Where C is redundant model

Log-linearization
Simple equations
New-Keynesian
∞   Phillips-curve
X ∗ θ
Et ω n β n e ln Pt (i)−ln Pt − e ln mct+n +ln Pt+n −ln Pt =0 New-Keynesian
θ−1 model
n=0
Impulse Response
Functions

56
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts
Log-linearization within brackets:
New-Keynesian
model
∞
Pt∗ (i)
 
X Households problem
Et ωn β n ln − ln 1 − ln mct+n − Firms problem

n=0
Pt Aggregate levels
Equations of the
! model
 !
Pt+n Log-linearization
− ln mc − ln − ln 1 =0 Simple equations
Pt New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

57
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction
Openning the bracket and rearranging: Stylized facts

∞ ∞ New-Keynesian
Pt∗ (i)
  
X X Pt+n
ω n β n ln = Et ω n β n (ln mct+n − ln mc) + ln − ln 1 model

n=0
Pt n=0
Pt Households problem
Firms problem
Aggregate levels
Equations of the
Goemetric sum: model

Log-linearization
∞
!
1 P ∗ (i) X n n Pt+n Simple equations
ln t = Et ω β (ln mct+n − ln mc) + ln New-Keynesian
Phillips-curve
1 − ωβ Pt n=0
Pt
New-Keynesian
model

Impulse Response
Functions

58
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts
Open the sum for n = 0-t. New-Keynesian
model
Households problem
1 P ∗ (i) Pt Firms problem
ln t = ln mct − ln mc + ln + Aggregate levels
1 − ωβ Pt Pt Equations of the
model
∞  
X Pt+n
+Et ω n β n (ln mct+n − ln mc) + ln Log-linearization

n=1
Pt Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

59
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Step it one period ahead Stylized facts

New-Keynesian
model
∞ Households problem
1 P ∗ (i) X Firms problem
Et ln t+1 = Et n n
ω β (ln mct+n+1 − ln mc) Aggregate levels
1 − ωβ Pt+1 n=0
Equations of the
model
! Log-linearization
Pt+n+1 Simple equations
+ ln New-Keynesian
Pt+1 Phillips-curve

New-Keynesian
model

Impulse Response
Functions

60
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

It is equal with Stylized facts

New-Keynesian
model
∞ Households problem
1 P ∗ (i) X Firms problem
Et ln t+1 = Et ω n−1 n−1
β (ln mct+n − ln mc) Aggregate levels
1 − ωβ Pt+1 n=1
Equations of the
model
! Log-linearization
Pt+n Simple equations
+ ln New-Keynesian
Pt+1 Phillips-curve

New-Keynesian
model

Impulse Response
Functions

61
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction
If we rearrange we get the same sum as before: Stylized facts

New-Keynesian
model
∞ Households problem
ωβ P ∗ (i) X Firms problem
Et ln t+1 = Et n n
ω β (ln mct+n − ln mc) Aggregate levels
1 − ωβ Pt+1 Equations of the
model
n=1
! Log-linearization
Pt+n Simple equations
+ ln New-Keynesian
Phillips-curve
Pt+1
New-Keynesian
model

Impulse Response
Functions

62
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts
Divide and multiply with Pt−1 :
New-Keynesian
model
Households problem
∞
ωβ P ∗ (i) X n n Firms problem
Et ln t+1 = Et ω β (ln mct+n − ln mc) Aggregate levels
1 − ωβ Pt+1 n=1
Equations of the
model
!
Pt+n Pt Log-linearization
+ ln + ln Simple equations
Pt Pt+1 New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

63
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts
Move ln PPt+1
t
from the sum: New-Keynesian
model
Households problem
∞
P ∗ (i)
 
ωβ X n n Pt+n Firms problem
Et ln t+1 = Et ω β (ln mct+n − ln mc) + ln Aggregate levels
1 − ωβ Pt+1 n=1
Pt Equations of the
model

1 Pt Pt Log-linearization
+ ln − ln Simple equations
1 − ωβ Pt+1 Pt+1 New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

64
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Rearraning:
Introduction

Stylized facts
∗ ∞
ωβ Pt+1 (i) ωβ Pt+1 X n n
Et ln + ln = Et ω β (ln mct+n − ln mc) New-Keynesian
1 − ωβ Pt+1 1 − ωβ Pt n=1 model
!
Pt+n Households problem
+ ln Firms problem
Pt Aggregate levels
Equations of the
model
Plug it to the original equation: Log-linearization
Simple equations
1 Pt∗ (i) Pt ωβ ∗
Pt+1 (i) New-Keynesian
ln = ln mct − ln mc + ln + Et ln Phillips-curve
1 − ωβ Pt Pt 1 − ωβ Pt+1 New-Keynesian
ωβ Pt+1 model
+ ln
1 − ωβ Pt Impulse Response
Functions

65
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Price-index:
Introduction
1
1−θ 1−θ ! 1−θ Stylized facts
Pt∗ (i)
 
Pt−1
1 = (1 − ω) +ω New-Keynesian
Pt Pt model
Households problem
Firms problem
Aggregate levels
Equations of the
Rearranging: model

Log-linearization
Simple equations
New-Keynesian
1−θ 1−θ Phillips-curve
Pt∗ (i)
 
Pt−1 New-Keynesian
1 = (1 − ω) +ω model
Pt Pt
Impulse Response
1−θ 1−θ
Pt∗ (i)
  Functions
Pt−1
1−ω = (1 − ω)
Pt Pt

66
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Log-linearization: Introduction

Stylized facts

New-Keynesian
−1 Pt−1 P ∗ (i) model
ω(1 − θ) ln = (1 − θ) ln t Households problem
1−ω Pt Pt Firms problem
Aggregate levels
Equations of the
model
Simplification:
Log-linearization
Simple equations
New-Keynesian
Phillips-curve
ω Pt P ∗ (i)
ln = ln t New-Keynesian
model
1 − ω Pt−1 Pt
Impulse Response
Functions

67
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Plug the into the pricing equation:

Introduction

1 ω Pt ωβ ω Pt+1 Stylized facts

ln = ln mct − ln mc + Et ln
1 − ωβ 1 − ω Pt−1 1 − ωβ 1 − ω Pt New-Keynesian
model
ωβ Pt+1
+ ln Households problem
1 − ωβ Pt Firms problem
Aggregate levels
Equations of the
model

Rearranging: Log-linearization
Simple equations
New-Keynesian
Phillips-curve
Pt (1 − ωβ)(1 − ω) Pt+1
ln = (ln mct − ln mc) + ωβEt ln New-Keynesian
Pt−1 ω Pt model

Pt+1 Impulse Response

+ (1 − ω)β ln Functions
Pt

68
 Macroeconomics II
New-Keynesian Phillips-curve
Dániel Baksa

Introduction

Stylized facts

New-Keynesian
And finally the New-Keynesian Phillips curve: model
Households problem
Firms problem
Aggregate levels

(1 − ωβ)(1 − ω) Equations of the

model
πt = m
d ct + βEt πt+1
ω Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

69
 Macroeconomics II
New-Keynesian model
Dániel Baksa

Introduction

Stylized facts
1 C C
 1 
C [
ct = Et C t+1 + ξ − ξ − i
bt − E π
t t+1 New-Keynesian
σ t t+1
σ model

ct = ξtL + η Lbt + σ C
Households problem
w ct Firms problem
Aggregate levels
ct − A
Lbt = C ct Equations of the
model

Log-linearization
m
d ct − A
ct = w ct
Simple equations

(1 − ωβ)(1 − ω) New-Keynesian
Phillips-curve
πt = m
d ct + βEt πt+1
ω New-Keynesian
model
ibt = φπ πt + ξti Impulse Response
Functions

70
 Macroeconomics II
New-Keynesian model
Dániel Baksa

We can substitute out the labor: Introduction

Stylized facts
  New-Keynesian
ct = ξtL + η C
w ct − A
ct + σ C
ct model
Households problem
Firms problem
Aggregate levels
And plug it to the marginal cost: Equations of the
model

Log-linearization
Simple equations
  New-Keynesian
m
d ct = ξtL ct − A
+η C ct − A
ct + σ C ct Phillips-curve

New-Keynesian
model
= ξtL ct − (1 + η)A
+ (η + σ)C ct
Impulse Response
Functions

71
 Macroeconomics II
New-Keynesian model
Dániel Baksa

Introduction

Now we have only three equation: Stylized facts

New-Keynesian
1 C C

1  model
C
ct = Et Cd
t+1 + ξt − ξt+1 − ibt − Et πt+1 Households problem
σ σ Firms problem
Aggregate levels
(1 − ωβ)(1 − ω)  L ct − (1 + η)A

Equations of the
πt = ξt + (η + σ)C ct + βEt πt+1 model
ω Log-linearization
ibt = φπ πt + ξti Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

72
 Macroeconomics II
New-Keynesian model
Dániel Baksa

We have seen before

R1
Pt Ct = 0 Pt (i)Ct (i)di Introduction

Stylized facts
and Yt (i) = Ct (i)
New-Keynesian
So on aggregate level Yt = Ct . model
Households problem
Firms problem
And the model: Aggregate levels
Equations of the
model

Log-linearization
1 C C

1 
Y
ct = Et Yd
t+1 + ξt − ξt+1 − ibt − Et πt+1 Simple equations
σ σ New-Keynesian
Phillips-curve
(1 − ωβ)(1 − ω)  L ct − (1 + η)A

New-Keynesian
πt = ξt + (η + σ)Y ct + βEt πt+1 model
ω
Impulse Response
ibt = φπ πt + ξti Functions

73
 Macroeconomics II
IRF: Demand shock
Dániel Baksa

Nominal interest rate Inflation

0.4 0.3

0.25 Introduction
0.3
0.2
Stylized facts
0.2 0.15
New-Keynesian
0.1 model
0.1
0.05
Households problem
Firms problem
0 0 Aggregate levels
5 10 15 5 10 15
Equations of the
model

GDP Log-linearization
0.25
Simple equations
0.2 New-Keynesian
Phillips-curve
0.15 New-Keynesian
model
0.1
Impulse Response
0.05
Functions
0
5 10 15

74
 Macroeconomics II
IRF: Supply shock
Dániel Baksa

Nominal interest rate Inflation

0.2 0.15

Introduction
0.15
0.1
Stylized facts
0.1
New-Keynesian
0.05 model
0.05
Households problem
Firms problem
0 0 Aggregate levels
5 10 15 5 10 15
Equations of the
model

GDP Log-linearization
0
Simple equations
New-Keynesian
Phillips-curve
-0.05
New-Keynesian
model
-0.1
Impulse Response
Functions
-0.15
5 10 15

75
 Macroeconomics II
IRF: Monetary policy shock
Dániel Baksa

Nominal interest rate Inflation

0.25 0

0.2
-0.1 Introduction
-0.2
0.15 Stylized facts
-0.3
0.1
New-Keynesian
-0.4 model
0.05
-0.5
Households problem
Firms problem
0 -0.6 Aggregate levels
5 10 15 5 10 15
Equations of the
model

GDP Log-linearization
0
Simple equations
-0.1 New-Keynesian
Phillips-curve
-0.2 New-Keynesian
model
-0.3
Impulse Response
-0.4
Functions
-0.5
5 10 15

76
 Macroeconomics II
IRF: Technology shock
Dániel Baksa

Nominal interest rate Inflation

0 0

-0.1 Introduction
-0.1
-0.2
Stylized facts
-0.3 -0.2
New-Keynesian
-0.4 model
-0.3
-0.5
Households problem
Firms problem
-0.6 -0.4 Aggregate levels
5 10 15 5 10 15
Equations of the
model

GDP Log-linearization
0.6
Simple equations
0.5 New-Keynesian
Phillips-curve
0.4
New-Keynesian
0.3
model
0.2
Impulse Response
0.1 Functions
0
5 10 15

77
 Macroeconomics II

Dániel Baksa

Introduction

Stylized facts

New-Keynesian
model
Thank you for your attention! Households problem
Firms problem
Aggregate levels
Equations of the
model

Log-linearization
Simple equations
New-Keynesian
Phillips-curve

New-Keynesian
model

Impulse Response
Functions

78