Flattening Phillips Curve, “Passive” Policy, and Incidence of the Self-fulfilling Prophecy in a Standard New-Keynesian Model with Financial Accelerator

Conference paper
Part of the Springer Proceedings in Business and Economics book series (SPBE)

Abstract

Post-crisis period is described by several stylized facts with a significant impact on the business cycles. Examples of such stylized facts consist in the Phillips curve flattening, very low inflation levels, or a “passive” stance of the monetary policy. Thus, it was contoured the so-called new normal era, which raises a series of caveats for the macroeconomic modeling. In this regard, the present paper comes to address the issue on the incidence of self-fulfilling prophecy in a New-Keynesian model extended with financial sector. This extension consists in defining an additional equation which introduces the financial accelerator related to lending conditions. Basically, calibrating the model for Romanian and Euro Area economies, the underlying work aims to investigate the operational circumstances in which the benchmark New-Keynesian framework can to be resorted for policy analysis, given the new stylized facts. By considering the condition for multiple rational expectations equilibria underlined by Bullard and Mitra (J Monet Econ 49:1105–1129, 2002), we analyzed the emergence of a unique bounded stationary equilibrium in the specified context. Preliminary results underline that under a “passive” monetary policy, flattening of the Phillips curve facilitates the occurrence of multiple rational expectations equilibria. Obtained results reveal also a nonlinear relation between interest rate spread elasticity with respect to the output-gap and the incidence of self-fulfilling prophecy. This work is normative, so further investigations have to be made on the appropriateness of a sunspot-based approach in order to study the business cycle mechanics within the present framework.

Keywords

Determinacy Financial Accelerator New-Keynesian Phillips Curve “Passive” Policy 

Notes

Acknowledgment

This work was supported by a grant of the Romanian National Authority for Scientific Research, CNCS – UEFISCDI, project number PN-II-RU-TE-2014-2499 entitled “Coordinating Monetary and Macroprudential Policies.”

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Copyright information

© Springer International Publishing AG 2018

Authors and Affiliations

  1. 1.The Romanian – American UniversityBucharestRomania

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