New Keynesian Dynamics in a Low Interest Rate Environment

Recent research has found that the dynamics of the New Keynesian model are very different when the nominal interest rate is zero. Positive technology shocks and negative shocks to the labor tax rate lower economic activity and the size of the government purchase multiplier can be as large as four. We consider the empirical relevance of these dynamics using Japanese data. We find that the New Keynesian model exhibits orthodox dynamics and the size of the government purchase multiplier is less than one in Japan.