detecting policy effects with wage rigidity and instability evidence on the taiwan labour market with stagnant wages and growing productivity a widening gap is becoming prevalent in global labour markets the relationship between wages and productivity has become indeterminate especially aft

targeting inflation by constant interest rate forecasts this paper reviews the concept of constant interest rate inflation forecast cir targeting it stresses the time inconsistent nature of cir targeting and provides a new method for constructing cir forecasts consistently in the context of models with forward looking variables a dynamic new keynesian model with forward looking price setting is used as an illustration suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities objective to smooth interest rate movements as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon

heterogeneity and misspecifications in learning abstract in this paper we consider a linear stochastic univariate forward looking model with one lag under adaptive heterogeneous learning the system is populated by two different types of agents who learn through recursive least squares techniques the parameter values in their forecasting models the two groups are constrained to have different information sets one being always a subset of the other we analyze convergence of these two interacting learning processes under different specifications of the forecasting model and in one case we find that an heterogenous expectations equilibrium emerges

a method for solving general equilibrium models with incomplete markets and many financial assets abstract this paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice the method can be applied to models with heterogeneous agents time varying investment opportunity sets and incomplete asset markets we illustrate the method using a two country model with production we check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties we then apply the method to an incomplete markets version where no analytic solution is available in all versions the standard accuracy tests confirm the effectiveness of our method

adjustment costs and indeterminacy in perfect foresight models abstract this paper suggests a method for resolving indeterminacy of equilibrium in perfect foresight models and applies it to several existing models quadratic adjustment costs are introduced into models with multiple equilibria and the limiting behavior of the resulting solutions is studied as the adjustment costs go to zero the method is shown to be useful in selecting among feasible equilibria in examples in which there is local indeterminacy

exchange market intervention under multiple solutions abstract this paper analyzes exchange market intervention in a small open economy in the analysis the solutions are refined by two alternative criteria under the minimal state solution a simple feedback rule can perfectly stabilize income fluctuation if and only if exogenous shocks are unanticipated and serially correlated however under a collective rational solution the simple rule can always perfectly stabilize income fluctuation regardless of the forms of exogenous shocks and their degrees of anticipation the latter result is surprising because this simple rule may be more effective than the rules derived in the previous literature

the ir relevance of real wage rigidity in the new keynesian model with search frictions we explore the role of real wage dynamics in a new keynesian business cycle model with search and matching frictions in the labor market both job creation and destruction are endogenous we show that the model generates counterfactual inflation and labor market dynamics in particular it fails to generate a beveridge curve vacancies and unemployment are positively correlated introducing real wage rigidity leads to a negative correlation and increases the magnitude of labor market flows to more realistic values however inflation dynamics are only weakly affected by real wage rigidity this is because of the presence of labor market frictions which generate long run employment relationships the measure of real marginal cost that is relevant for inflation dynamics via the phillips curve contains a dynamic component that does not necessarily move with real wages

ppp exchange rate rules macroeconomic in stability and learning in order to maintain competitiveness governments in developing economies seem to have pursued purchasing power parity ppp exchange rate rules by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target this article shows that these rules are likely to induce macroeconomic instability as they generate sunspot driven fluctuations that are in fact learnable by agents in the expectational stability sense it finds that the existence of these learnable sunspots depends among others on open economy features including the degree of openness and the degree of exchange rate pass through to consumer s import prices

multiple solution indeterminacies in monetary policy analysis abstract a sizeable fraction of recent research on monetary policy has been concerned with issues relating to analytical indeterminacies i e multiple solutions in rational expectations re models most of the literature features sophisticated re analysis conducted within dynamic models that reflect optimizing behavior by individual agents and incorporate taylor style policy rules a few papers have suggested that some of the particular indeterminacy arguments are misleading or irrelevant for the most part however there has been little dissent from the position that these indeterminacies present a genuine problem for monetary policy makers the purpose of the present paper by contrast is to argue that conclusions based on multiple solution indeterminacy findings are of dubious merit rather generally

optimal constrained interest rate rules we show that if policymakers compute the optimal unconstrained interest rate rule within a taylor type class they may be led to rules that generate indeterminacy and or instability under learning this problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration we advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations and that minimize the expected loss computed using structural parameter priors subject to this constraint

the butterfly effect of small open economies abstract the rational expectations equilibrium of a small open economy can be subject to indeterminacy if foreign monetary policy does not satisfy the taylor principle we study the implications of foreign induced indeterminacy in the two country version of the sticky price small open economy model our main finding is that smallness is a property of the unique rational expectations equilibrium of the large economy and not a general property of the small open economy model if the large economy fails to anchor expectations shocks to the small economy can affect the large one this form of indeterminacy gives rise to a butterfly effect additional assumptions are required to preserve the smallness of the small economy

who is against immigration a cross country investigation of individual attitudes toward immigrants abstract this paper empirically analyzes economic and noneconomic determinants of individual attitudes toward immigrants within and across countries the two survey data sets used covering a wide range of developed and developing countries make it possible to test for interactive effects between individual characteristics and country level attributes in particular theory predicts that the correlation between pro immigration attitudes and individual skill should be related to the skill composition of natives relative to immigrants in the destination country skilled individuals should favor immigration in countries where natives are more skilled than immigrants and oppose it otherwise results based on direct and indirect measures of the relative skill composition are consistent with these predictions noneconomic variables also are correlated with immigration attitudes but they don t alter significantly the labor market results

stable near rational sunspot equilibria abstract we introduce a new class of solutions to nonlinear forward looking models called near rational sunspot equilibria nrse nrse are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy and are near rational in that agents use the optimal linear forecasting model when forming expectations generic results for existence and stability under learning are established nrse in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model s minimal state variable solution is e stable nrse are readily computable and our results make it possible to use the standard linear tools to search for stable nrse we illustrate our results using a canonical nonlinear new keynesian model

exchange market intervention under alternative forms of exogenous disturbances abstract this paper analyzes exchange market intervention in a stochastic model of a small open economy the distinction is made between disturbances which are unanticipated and anticipated on the one hand and those that are perceived as being transitory or permanent on the other it is shown how the appropriate form of exchange market intervention is sensitive to these aspects of the disturbances of particular interest is the case of an unanticipated permanent disturbance when output may be stabilized perfectly about its frictionless level by the use of a very simple class of intervention rules the optimal rules in other cases are also discussed

tax base and crowding in effects of balanced budget fiscal policy a dynamic general equilibrium business cycle model is constructed with staggered price adjustment monopolistic wage setting and distortionary taxation the government purchases goods runs an unemployment benefit system and balances its budget through a proportional tax on labour income a temporary tax financed increase in government expenditures can lower the tax rate through a demand induced widening of the tax base it is shown analytically that this allows private consumption to rise under realistic conditions despite the negative wealth effect of increased fiscal spending

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

on the job search sticky prices and persistence abstract models of the monetary transmission mechanism often generate empirically implausible business fluctuations this paper analyzes the role of on the job search in the propagation of monetary shocks in a sticky price model with labor market search frictions such frictions induce long term employment relationships such that the real marginal cost is determined by real wages and the cost of an employment relationship on the job search opens up an extra channel of employment growth that dampens the response of these two components because real marginal cost rigidity induces small price adjustments on the job search gives rise to a strong propagation of monetary shocks that increases output persistence

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

swallowing the bitter pill sources of popular support for neoliberal reform in latin america what accounts for the surprisingly widespread popular approval that painful neoliberal reforms elicited in several latin american countries this article compares the explanatory power of two rival hypotheses which draw on conventional rational choice and psychological decision theory the compensation hypothesis claims that governments can engineer support for costly reforms by compensating the losers through targeted social benefits the rescue hypothesis questions this claim and maintains that draconian adjustment only finds support if it promises to revert a deep crisis and avert further losses data from argentina bolivia brazil mexico peru and venezuela suggest that the rescue hypothesis accounts much better for the initial endorsement of neoliberal shock programs immediately after their enactment when these shock programs bring about economic stabilization and recovery targeted social benefits help consolidate support for neoliberalism which a statistical analysis of the impact of social s

equilibrium unemployment job flows and inflation dynamics this paper develops a general equilibrium model to explain a set of facts regarding job flows unemployment and inflation dynamics it integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities the labor market displays matching frictions and endogenous job destruction the model can explain the cyclical behavior of unemployment job creation job destruction and the joint fluctuations of the labor input along both the extensive and the intensive margin conditional on a shock to monetary policy allowing for variation of the labor input at the extensive margin leads to a significantly lower elasticity of marginal costs with respect to output this helps to explain the sluggishness of inflation and the persistence of output after a monetary policy shock

money stock targeting and money supply a closer examination of the data in a recent paper mercenier and sekkat 1988 use a linear quadratic model to examine the willingness of a monetary authority in a small open economy to target its exchange rate based on their empirical results the authors conclude that the bank of canada has displayed a willingness to use the money supply to target the canada us exchange rate we re examine their empirical results using a different estimation approach and with different assumptions about the forcing process of the exogeneous variables we also extend the sample period to include more recent observations while we find some weak evidence to support their conclusion the results in general suggest that a linear quadratic model may not be a particularly useful representation of the assumed exchange rate targeting by a monetary authority

learning monetary policy and asset prices this working paper should not be reported as representing the view s of the imf the views expressed in this working paper are those of the author s and do not necessarily represent those of the imf or imf policy working papers describe research in progress by the author s and are published to elicit comments and to further debate

does the lucas critique apply during hyperinflation empirical evidence from four hyperinflationary episodes farmer review of economic studies 58 321 32 1991 suggests that in a model in which there are multiple rational expectations equilibria agents may find it useful to coordinate their expectations in a unique rational expectations equilibrium which is supported by a self fulfilling forecast rule having the property of being immune to the lucas critique in this paper farmer s hypothesis is tested using data from hyperinflationary episodes it is believed that those episodes are suitable for testing this hypothesis because an agent who lives in a hyperinflationary environment usually faces frequent changes in policy regime the agent may thus choose a selffulfilling forecast rule which is immune to the lucas critique as a way of hedging against unanticipated policy regime switches the empirical results show mixed evidence on farmer s hypothesis during the hyperinflationary episodes studied

adjustment costs learning and indeterminacy abstract i compare the adjustment cost and learning approaches to resolving indeterminacy of perfect foresight equilibrium in a continuous time model with local indeterminacy rapid learning tends to select different perfect foresight equilibria of the original model than does the inclusion of vanishing adjustment costs this difference has implications for the dynamic response of the economy to unanticipated shocks

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

learning about monetary policy rules when labor market search and matching frictions matter abstract this paper examines the implications of labor market search and matching frictions for determinacy and e stability of rational expectations equilibrium ree in a sticky price model with interest rate policy when labor adjustment takes place solely at the extensive margin forecast based policy that meets the taylor principle is likely to induce indeterminacy and e instability regardless of whether it is strictly or flexibly inflation targeting when labor adjustment takes place at both the extensive and intensive margins the strictly inflation forecast targeting policy remains likely to induce indeterminacy but it generates a unique e stable fundamental ree as long as the taylor principle is satisfied therefore the presence of search and matching frictions changes the determinacy properties of a strictly inflation forecast targeting policy and alters its e stability properties when only an extensive margin is present but not when labor adjustment takes place at both margins

long term economic distress cultural backlash and support for brexit economic and cultural factors are often presented as alternative explanations of brexit most studies have failed to recognize the interplay between contextual economic factors and individual attit

comparative statics and perfect foresight in infinite horizon economies does a pure exchange economy with an infinite time horizon have determinate perfect foresight equilibria when there is a finite number of infinitely lived agents equilibria are generically determinate this is not true with overlapping generations of finitely lived agents we ask whether the initial conditions together with the requirement of convergence to a steady state locally determine an equilibrium price path in this framework there are many economies with isolated equilibria many with continua of equilibria and many with no equilibria at all with two or more goods in every period not only can the price level be indeterminate but relative prices as well furthermore such indeterminacy can occur whether or not there is fiat money and whether or not the equilibria are pareto efficient this paper considers whether infinite horizon economies have determinate perfect foresight equilibria this question is of crucial importance if instead equilibria are locally indeterminate not only are we unable to make comparative static predictions but the agents in the model are unable to determine the consequences of unanticipated shocks the idea underlying perfect foresight is that agents expectations should be the actual future sequence predicted by the model if the model does not make determinate predictions the concept of perfect foresight is meaningless we consider two extreme cases the first with a finite number of infinitely lived consumers and the second with an infinite number of finitely lived consumers an overlapping generations model both are models of stationary pure exchange economies no production including the storage of goods between periods can occur these models are unrealistic but are the easiest to study extensions of the results of this paper to models with production infinitely lived assets and mixtures of the two types of consumers are presented by muller and woodford 29 when there is a finite number of infinitely lived consumers we argue that equilibria are generically determinate this is because the effective number of equations determining equilibria is not infinite but equal to the number of agents minus one and must determine the marginal utility of income for all but one agent generically near an equilibrium these equations are independent and exactly determine the unknowns when there are infinitely many overlapping generations this reasoning breaks down an infinite number of equations is not necessarily sufficient to determine

determinacy and expectational stability of equilibrium in a monetary sticky price model with taylor rule abstract recent studies show that the taylor rule possesses desirable properties in terms of generating determinacy and e stability of rational expectations equilibria under sticky prices this paper examines whether this policy rule retains these properties within a discrete time money in utility function model employing three timings of money balances of the utility function that the existing literature contains end of period timing and two types of cash in advance timing this paper shows i even a small degree of non separability of the utility function between consumption and real balances causes the taylor rule to be much more likely to induce indeterminacy or e instability if this rule responds not only to inflation but also to output or the output gap ii differences among the three timings strongly alter conditions for the taylor rule to ensure both determinacy and e stability

a simple nonnegative process for equilibrium models abstract this paper presents a general specification for dynamic equilibrium models where nonnegative variables follow the autoregressive gamma process in jasiak and gourieroux 2006 the model solution implies linear dynamics for endogenous variables and provides conditional and unconditional moments in closed form finding the solution is computationally inexpensive requiring only to solve linear and quadratic equations the specification can be applied to a wide variety of models in finance and economics two applications are presented first a time varying volatility premium in a long run risks asset pricing model second time varying volatility in policy shocks in a simple new keynesian model accuracy in these models solutions is high and not significantly affected by time varying volatility

realized and optimal monetary policy rules in an estimated markov switching dsge model of the united kingdom this paper investigates underlying changes in the u k economy over the past thirty five years using a small open economy dsge model using bayesian analysis we find uk monetary policy nominal price rigidity and exogenous shocks are all subject to regime shifting a model incorporating these cha nges is used to estimate the realised monetary policy and derive the optimal mon etary policy for the uk this allows us to assess the effectiveness of the realis ed policy in terms of stabilising economic fluctuations and in turn provide an ind ication of whether there is room for monetary authorities to further improve their polic ies

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

spending reversals and fiscal multipliers under an interest rate peg this paper examines whether fiscal stimuli are more effective when the monetary policy is less responsive to inflation first we provide empirical evidence suggesting that in the period of u s passive monetary policy a positive government spending shock was followed over time by a spending cut second our theoretical analysis reveals that the pegged nominal interest rate is not a sufficient condition to generate a large fiscal multiplier an increase in government spending could increase the long run real interest rate if it is associated with a government spending reversal and a less responsive monetary policy consequently the response of private consumption can be negative and the government spending multiplier is not necessarily greater than 1

trend inflation sticky prices and expectational stability abstract micro evidence indicates that each period a fraction of prices is kept unchanged under a positive trend inflation rate in a sticky price model based on this evidence recent research shows that high trend inflation is a serious cause for indeterminacy of rational expectations equilibrium under the taylor rule this paper examines implications of trend inflation for expectational stability of the equilibrium an empirically plausible calibration of the model demonstrates that a fundamental rational expectations equilibrium is likely to be expectationally stable even in cases of indeterminacy induced by high trend inflation

productivity growth transparency and monetary policy abstract this study examines whether central bank transparency about views of future productivity growth contributes to stabilizing macroeconomic fluctuations in a standard new keynesian model the central bank and private agents make their subjective estimates on the persistence of productivity growth in this situation if private agents believe that the central bank s projections include forecast errors on future productivity growth these beliefs can destabilize private agents own expectations because the central bank s forecast errors may lead to policy mistakes in the future consequently central bank transparency does not necessarily stabilize the variations of the output gap and inflation rate the central bank should respond strongly to the inflation rate if the impact of transparency is uncertain

ramsey monetary policy with labor market frictions abstract traditional new keynesian models prescribe that optimal monetary policy should aim at price stability in the absence of a labor market frictions the monetary authority faces no unemployment inflation trade off the design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market optimal policy features deviations from price stability in response to both productivity and government expenditure shocks when the hosios 1990 on the efficiency of matching and related models of search and unemployment review of economic studies 57 2 279 298 condition is not met search externalities make the flexible price allocation unfeasible optimal deviations from price stability increase with workers bargaining power as firms incentives to post vacancies fall and unemployment fluctuates above the pareto efficient one

on the fragility of sunspot equilibria under learning and evolutionary dynamics abstract in this article we investigate the possibility of sunspot equilibria to emerge from a process of learning and adaptation on agents beliefs we consider both finite state markov sunspots and sunspots in autoregressive form and derive conditions for the existence of an heterogeneous equilibrium where only a fraction of agents condition their forecasts on the sunspot we then show that when the fraction of agents conditioning their forecasts on a sunspot changes over time under evolutionary dynamics these restrictions need to evolve endogenously with population shares we argue that such requirement questions the possibility of sunspot equilibria to emerge through a process of evolution and adaptation on agents beliefs in order for a sunspot equilibrium to emerge all agents must simultaneously coordinate on the same sunspot variable at the same time

seasonal cycles business cycles and monetary policy abstract this paper presents a dynamic general equilibrium model that is consistent with both seasonal and business cycle facts in the u s economy the model features consumption durability and a transaction technology both crucial in accounting for seasonal patterns of nominal variables a calibrated version of the model is used to quantitatively evaluate welfare consequences of three alternative monetary policy rules 1 the fed s historical policy that smooths nominal interest rates at the seasonal frequency but not at the business cycle frequency 2 a constant money growth rule and 3 a constant interest rate rule we find that the historical policy is associated with higher welfare than both alternatives

fundamentalists vs chartists learning and predictor choice dynamics abstract in a simple forward looking univariate model of price determination we investigate the evolution of expectations dynamics in the presence of two types of agents fundamentalists and chartists in particular we combine evolutionary selection among heterogeneous classes of models through predictor choice dynamics based on a logit model with adaptive learning in the form of parameters updating within each class of rules we find that for different parameterizations it can happen that fundamentalists drive chartists completely out of the market or vice versa and also that heterogeneous equilibria in which fundamentalists and chartists coexist are possible interestingly though only equilibria in which fundamentalists outperform chartists turn out to be adaptively learnable by agents

monetary policy indeterminacy and learning abstract forward looking monetary models with taylor type interest rate rules are known to generate indeterminacies with a potential dependence on extraneous sunspots for some structural and policy parameters we investigate the stability of these solutions under adaptive learning focusing on common factor or resonance frequency representations in which the observed sunspot has a suitable time series structure we consider specifications incorporating both lagged and expected inflation in the phillips curve and both expected and inertial elements in the policy rule we find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises

are hyperinflation paths learnable abstract earlier studies of the seigniorage inflation model have found that the high inflation steady state is not stable under learning we reconsider this issue and analyze the full set of solutions for the linearized model our main focus is on stationary hyperinflationary paths near the high inflation steady state these paths are shown to be stable under least squares learning if agents can utilize contemporaneous data in an economy with a mixture of agents some of whom only have access to lagged data stable hyperinflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high

learning and the central bank abstract it is well known that sunspot equilibria may arise under an interest rate operating procedure in which the central bank varies the nominal rate with movements in future inflation a forward looking taylor rule this paper demonstrates that these sunspot equilibria may be learnable in the sense of e stability

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

optimal monetary policy in a new keynesian model with job search abstract this paper studies the implications for optimal monetary policy of introducing job search into the new keynesian framework using the linear quadratic approach described by benigno and woodford 2008 we derive a utility based loss function that indicates that the goals of policymakers can be represented by the stabilization of inflation output employment and labor market tightness we characterize the policy that is optimal from a timeless perspective complete inflation stabilization is optimal if the distortions caused by monopolistic competition and search externalities are eliminated in cases where search externalities prevail either in or out of the steady state complete inflation stabilization is no longer optimal and the optimal responses of inflation to aggregate shocks may depend on labor market fundamentals

uncovered interest parity monetary policy and time varying risk premia abstract in a recent paper mccallum argued that monetary policy behavior can be responsible for the apparent empirical failure of uncovered interest parity uip the present paper investigates whether optimizing policy behavior can account for the observed regime dependence of uip evidence the main result is that the tradeoff between interest rate and exchange rate stability is a potential candidate for the explanation of the apparent failure of uip and that the consideration of policy reactions can explain why deviations from uip differ systematically by the exchange rate regime

fiscal policy in the new neoclassical synthesis we analytically derive the cyclical effects of fiscal policy shocks in a new neoclassical synthesis model price stickiness has the consequence that a rise in government demand affects labor demand while at the same time the usual wealth effect boosts labor supply the strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime when the central bank controls money growth fiscal expansions are deflationary and might even be contractionary whereas output wages and inflation can increase when the rise in the real interest rate is dampened by an interest rate rule however price stickiness alone is not sufficient to explain a rise in consumption as predicted by keynesian theory

search and matching frictions and optimal monetary policy abstract a recent literature has merged the new keynesian and the search and matching frameworks which has allowed the former to analyze the joint dynamics of unemployment and inflation this paper analyzes optimal monetary policy in this kind of hybrid framework i show that zero inflation is optimal when all wages are nash bargained in every period and the economy s steady state is efficient in the more realistic case in which nominal wage bargaining is staggered a case against price stability arises in response to real shocks the central bank should use price inflation so as to avoid excessive unemployment volatility and excessive dispersion in hiring rates for a plausible calibration the welfare loss under the zero inflation policy is about three times as large as under the optimal policy

equilibrium beliefs in linear rational expectations models abstract non unique equilibria are widely found in dynamic models with money increasing returns and imperfect competition this paper provides a convenient method for representing the entire set of equilibria in a large class of models similar to those studied by blanchard and kahn the method utilizes restrictions imposed on comovements implied by the structures of such models it is an aid in theoretical analysis and can be instrumental in the development of econometric tests of indeterminacy and sunspots important restrictions on admissible non fundamental uncertainty and on model forecasts are also highlighted

inflation and labor market dynamics revisited abstract we demonstrate that the presence of an empirically plausible labor adjustment decision at the firm level rationalizes strategic complementarities in price setting which help explain inflation dynamics those strategic complementarities are typically assumed away in the related existing literature this motivates our revisiting of inflation and labor market dynamics

interest rate rules vs money growth rules a welfare comparison in a cash in advance economy abstract this paper considers the welfare consequences of two particularly simple rules for monetary policy an interest rate peg and a money growth peg the model economy consists of a real side that is the standard real business cycle model and a monetary side that amounts to imposing cash in advance constraints on certain market transactions the paper also considers the effect of assuming a rigidity in the typical household s cash savings choice the competitive equilibrium of the economy is not pareto efficient partly because of two distortions a distortion on the capital accumulation decision and a distortion on portfolio choice that arises from the assumed rigidity the principal result of the paper is that the interest rate rule but not the money growth rule entirely eliminates these two distortions and is thus the benevolent central banker s policy choice

phillips curve instability and optimal monetary policy this paper assesses the implications for optimal discretionary monetary policy if the slope of the phillips curve changes the paper first derives a phillips curve from the optimal pricing decision of a monopolistic firm that faces a changing cost of price adjustment the second aspect of the paper constructs a utility based welfare criterion a novel feature of this criterion is that is has a relative weight on output gap deviations that changes synchronously with changes in the cost of price adjustment the systematic component of the targeting rule that implements the optimal discretionary policy under the utility based criteria is constant in contrast the systematic component of the targeting rule under an ad hoc criteria changes along with changes in the slope of the phillips curve

are non fundamental equilibria learnable in models of monetary policy abstract recent models of monetary policy can have indeterminacy of equilibria which is often viewed as a difficulty of these models we consider the significance of indeterminacy using the learning approach to expectations formation we employ expectational stability as a selection criterion for different equilibria and derive the expectational stability and instability conditions for forward looking multivariate models both without and with lags the results are applied to several monetary policies

money stock targeting and money supply an intertemporal optimization approach with an application to canada we propose a model of the short term behaviour of the monetary authorities of a small open economy that is willing to stabilize to some extent its bilateral exchange rate vis a vis a dominant partner the optimal money supply strategy is derived using intertemporal optimization arguments in a rational expectations environment the model is formulated so as to avoid the time inconsistency problem stressed by kydland and prescott 1977 it allows econometric estimation of the optimal money supply rule as well as of the parameters of the intertemporal utility function and of the function that defines the intermediate target money stock the model is successfully estimated on canadian quarterly data using maximum likelihood techniques copyright 1988 john wiley sons ltd

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

monetary policy expectations and commitment commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies a number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy we assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents a reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts

backward and forward solutions for economies with rational expectations in models where anticipations of future endogenous variables influence current behavior there exists an infinity of solutions under the assumption of rational expectations this problem has been dealt with in the study of macro economic models by the implicit or explicit use of one of three additional requirements optimality consistency with alleged economic behavior or conformity of the endogenous variables to an imposed stationarity condition these requirements have coincided in existing models leading to the choice of a unique solution a forward solution the purpose of this paper is to review the problem characterize the solutions and examine whether these requirements are acceptable section i presents a simple model and derives the set of solutions the model makes no claim to generality but has the major advantage that the issues are easily understood in this simple case section ii discusses the requirement of consistency with economic behavior section iii discusses the requirement of stationarity and section iv provides some conclusions