Old-Keynesianism in the New Keynesian Model

Abstract

AbstractI investigate an ‘old Keynesian’ fiscal policy in which government spending endogenously responds to inflation and the output gap when the nominal interest rate is pegged at the ZLB. I do so within a standard Representative Agent New Keynesian model (RANK), as well as a two-period Overlapping Generations New Keynesian model (OLG-NK). For both model versions, I find that the equilibrium values for inflation and the output gap under a standard Taylor rule regime can be replicated under the ‘old Keynesian’ regime. However, a unique stable countercyclical equilibrium is only feasible within the OLG-NK model and crucially depends on the pension system.