# Resolving New Keynesian Anomalies with Wealth in the Utility Function

## TL;DR

This paper introduces wealth into the utility function of a New Keynesian model to resolve zero-lower-bound anomalies, showing that social status considerations can fundamentally alter equilibrium dynamics.

## Contribution

It proposes a novel modification to the utility function by incorporating wealth as a status marker, addressing key anomalies at the zero lower bound.

## Key findings

- Wealth inclusion transforms the equilibrium from a saddle to a source.
- The model predicts more plausible output and inflation dynamics at the zero lower bound.
- Government spending and forward guidance effects become more realistic.

## Abstract

At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels, and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source---which resolves all the anomalies.