Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240349 
Year of Publication: 
2021
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 9/2021
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Macroeconomic models typically assume additively separable preferences where consumption enters the utility function in a logarithmic form. This restriction implies that consumption growth is highly sensitive to movements in real interest rates, which in turn implies an unrealistically steep demand curve and intertemporal trade-off. We re-estimate the stylized New Keynesian Model with US data using King-Plosser-Rebelo (1988) preferences with and without habits and show that the equilibrium real interest rate elasticity of output is in the range of 0.05 - 0.20 in the US. Such low real interest rate elasticity is better in line with the empirical consumption Euler equation literature and implies relatively weak transmission of monetary policy to output and inflation.
Subjects: 
Monetary policy
Bayesian estimation
Non-separable utility
JEL: 
E32
E52
E21
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-379-9
Document Type: 
Working Paper

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