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New Keynesian dynamics in a low interest rate environment

By R. Anton Braun and Lena Mareen Koerber

Abstract

Recent research has found that the dynamic properties of the New Keynesian model are unorthodox when the nominal interest rate is zero. Improvements in technology and reductions in the labor tax rate lower economic activity and the size of the government purchase output multiplier is very large. This paper provides evidence that these results are not empirically relevant. We show that a prototypical New Keynesian model fit to Japanese data exhibits orthodox dynamics during Japan's episode with zero interest rates. We then demonstrate that this specification is more consistent with outcomes in Japan than alternative specifications that have unorthodox properties

Topics: HB Economic Theory
Publisher: Elsevier
Year: 2011
DOI identifier: 10.1016/j.jedc.2011.08.006
OAI identifier: oai:eprints.lse.ac.uk:38593
Provided by: LSE Research Online
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