Question

SLEIUNU. PICase allsWelaly vyu 5. a) In the New Keynesian model, explain how each of the following parameters affect the coefficient on the output gap in the New Keynesian Phillips Curve : The marginal disutility of labour The intertemporal elasticity of substitution iii) The discount factor [25 marks]

Answer 1

The NKPC describes a simple relationship between inflation, firms' expectation of future inflation, and actual marginal costs, ie the inflation-adjusted real resources that companies must spend to produce an additional unit of their good or service.

Please find the attachment:

Marginal disutility of labor
1.This model focuses
wide range of work, consistent with
Conventional definition of unemployment. Like most of the variation
The hours worked during the economic cycle are due to changes in employment and
hours per employee, this change has no significant consequences
yourself. We also combined two alternative wage measures in the estimate,
compensation and earnings and explicitly model their discrepancy and secondly
we generalize the utility function in a way that allows us to describe
wealth effect on labor supply.

2. The intertemporal elasticity of
replacement in the new Keynesian structural model. The intertemporal elasticity of substitution is one. KPR preferences allow
to a nonzero cross elasticity between consumption and labor and that
Elasticity is closely linked to the inter temporal elasticity of substitution. We show
analytically, with KPR preferences, the relationship between initiation and
product gap, that is, the slope of the Phillips curve depends only weakly on the
intertemporal elasticity of substitution in contrast to the most common separable preference
specification. This means that estimating the HEI together with the New
The Phillips Keynesian curve does not limit the HEI estimate, which is still
Mainly identified from the relationship between the product and the real interest rate.

3. The new Keynesian model is the pillar of the modern monetary economy and as per New Keynesian theory the actual rate equals the discount rate over time. If the nominal rate is zero inflation will be less than the time discount factor.

Marginal disutilay of labout A person majoured in type i labor corial with the disorilty of work Xejt Applying household welfare as a criterio and taking of provided present labor economic Conditcont. that the person fred it good to pesnicipate nor the labor moshat in period & If and solely lf Wo X 7 14 I ndicate Thus, the morgnal supplier of type ilobor, which by to) is implicity Jogosted by Woci) – X, Zhole PE Taking logs and intes conreaty over we get WE-Pt - zt & 2 teto Whore 4 = 1+1 istorten rate as the molds loupled (109) aggregate lobor torce or postusporun rate.