Euler equations and monetary policy

Euler equations are the key link between monetary policy and the real economy in NK models. Under separable preferences, they fail to match interest rates. Non-separability between leisure and consumption significantly improves their fit and reliability for studying monetary policy.

► Euler equations link monetary policy and the real economy in NK models. ► Under separable preferences, they fail to match interest rates. ► Non-separability between leisure and consumption significantly improves their fit. ► It also improves their reliability for studying monetary policy.