optimal monetary policy in an economy with inflation persistence abstract this paper studies optimal monetary policy in a model where inflation is persistent two types of price setters are assumed to exist one acts rationally given calvo type constraints on price setting the other type sets prices according to a rule of thumb this results in a phillips curve with both a forward looking term and a backward looking term the phillips curve nests a standard purely forward looking phillips curve as well as a standard purely backward looking phillips curve as special cases a cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic a central bank loss function for this model is derived from a second order taylor approximation of the household s welfare function optimal monetary policy for different relative values of the forward and backward looking terms is then analyzed for both the commitment case and the case of discretion

inflation price level and hybrid rules under inflation uncertainty the performance and robustness of optimised interest rate rules are analysed in a new keynesian model estimated for the euro area economy in particular we examine the properties of rules responding to inflation the price level or a combination of the two a hybrid rule all the rules also respond to the output gap the optimal hybrid rule is only marginally superior when there is no model uncertainty when there is uncertainty about the degree of inflation persistence the inflation rule is the most robust rule and the performance of the other two rules deteriorates however all the rules perform well if the true degree of inflation persistence turns out to be less than policymakers estimate

social preferences under risk equality of opportunity versus equality of outcome this paper axiomatizes a utility function for social preferences under risk in the model a single parameter captures a preference for equality of opportunity i e equality of exante expected payoffs relative to equality of outcome i e equality of ex post payoffs in a deterministic environment the model reduces to the model of fehr and schmidt 1999 the model is consistent with recent experiments on probabilistic dictator games

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

if the worst comes to the worst dictator giving when recipient s endowments are risky abstract donors may often not be sure whether a recipient really needs their help does this uncertainty deter generosity we experimentally investigate a situation in which donors do not know the financial endowment of the recipient for certain but still have some information on the distribution the endowments are drawn from in the experiment we find that uncertainty does not deter generosity in fact if we filter out selfish dictators under most specifications of uncertainty dictators give more compared with the donation dictators make to a recipient they know to have the expected value of the endowment with certainty they are particularly concerned about the possibility of a recipient leaving the lab with no payoff from the game

excusing selfishness in charitable giving the role of risk decisions involving charitable giving often occur under the shadow of risk a common finding is that potential donors give less when there is greater risk that their donation will have less impact while this behaviour could be fully rationalized by standard economic models this article shows that an additional mechanism is relevant the use of risk as an excuse not to give in a laboratory study participants evaluate risky payoffs for themselves and risky payoffs for a charity when their decisions do not involve tradeoffs between money for themselves and the charity they respond very similarly to self risk and charity risk by contrast when their decisions force tradeoffs between money for themselves and the charity participants act more averse to charity risk and less averse to self risk these altered responses to risk bias participants towards choosing payoffs for themselves more often consistent with excuse driven responses to risk additional results support the existence of excuse driven types

just luck an experimental study of risk taking and fairness choices involving risk significantly affect the distribution of income and wealth in society this paper reports the results of the first experiment to our knowledge to study fairness views about risk taking specifically whether such views are based chiefly on ex ante opportunities or on ex post outcomes we find that even though many participants focus exclusively on ex ante opportunities most favor some redistribution ex post many participants also make a distinction between ex post inequalities that reflect differences in luck and ex post inequalities that reflect differences in choices these findings apply to both stakeholders and impartial spectators

price level targeting vs inflation targeting a free lunch price level targeting without base drift and inflation targeting with base drift are compared under commitment and discretion with persistence in unemployment price level targeting is often said to imply more short run inflation variability and thereby more employment variability than inflation targeting counter to this conventional wisdom under discretion a price level target results in lower inflation variability than an inflation target if unemployment is at least moderately persistent a price level target also eliminates the inflation bias under discretion and as is well known reduces long term price variability society may be better off assigning a price level target to the central bank even if its preferences correspond to inflation targeting a price level target thus appears to have more advantages than commonly acknowledged

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

identifying the free riders a simple algorithm for determining who will contribute to a public good abstract when a heterogeneous group of people provide themselves with a pure public good the resulting nash equilibrium outcome will divide the group into contributors and free riders this paper proposes a general algorithm for discovering which individuals in the group fall into which of these two classes the algorithm is based on identifying for each individual how much of the public good must be provided by others to drive that individual s contribution to zero

solution and estimation of re macromodels with optimal policy macro models of monetary policy typically involve forward looking behavior except in rare circumstances we have to apply some numerical method to find the optimal policy and the rational expectations equilibrium this paper summarizes a few useful methods and shows how they can be combined with a kalman filter to estimate the deep model parameters with maximum likelihood simulations of a macro model with staggered price setting interest rate elastic output and optimal monetary policy illustrate the properties of this estimation approach

speed limit policies the output gap and optimal monetary policy in a standard new keynesian model a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal timeless perspective precommitment policy by stabilizing output gap changes the central bank imparts inertia into output and inflation that is absent under pure discretion even a fully optimizing i e non myopic central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting this abstract was borrowed from another version of this item

robust monetary policy with competing reference models abstract the existing literature on robust monetary policy rules has largely focused on the case in which the policymaker has a single reference model while the true economy lies within a specified neighborhood of the reference model in this paper we show that such rules may perform very poorly in the more general case in which non nested models represent competing perspectives about controversial issues such as expectations formation and inflation persistence using bayesian and minimax strategies we then consider whether any simple rule can provide robust performance across such divergent representations of the economy we find that a robust outcome is attainable only in cases where the objective function places substantial weight on stabilizing both output and inflation in contrast we are unable to find a robust policy rule when the sole policy objective is to stabilize inflation we analyze these results using a new diagnostic approach namely by quantifying the fault tolerance of each model economy with respect to deviations from optimal policy

maintaining price stability how long is the medium term using a small estimated forward looking model of the euro area economy this paper analyses the determinants of the optimal monetary policy horizon for maintaining price stability first the optimal policy horizon for a price level objective is generally longer than that for an inflation objective second the policy horizon becomes longer the greater the weight on other objectives like minimising output gap and interest rate variability third the optimal policy horizon is shorter the higher the degree of forward lookingness in the economy and the greater the slope of the phillips curve finally even if society cares only about inflation stabilisation it often pays to give the central bank a price level objective provided the horizon is optimally chosen to be somewhat longer

does willful ignorance deflect punishment an experimental study abstract this paper studies whether people can avoid punishment by remaining willfully ignorant about possible negative consequences of their actions for others we employ a laboratory experiment using modified dictator games in which a dictator can remain willfully ignorant about the payoff consequences of his decision for a receiver a third party can punish the dictator after observing the dictator s decision and the resulting payoffs on the one hand willfully ignorant dictators are punished less if their actions lead to unfair outcomes than dictators who reveal the consequences before implementing the same outcome on the other hand willfully ignorant dictators are punished more than revealing dictators if their actions lead to fair outcomes we conclude that willful ignorance can circumvent blame when unfair outcomes result but that the act of remaining willfully ignorant is itself punished regardless of the outcome models of procedural fairness combining ex ante and ex post fairness qualitatively predict the observed punishment pattern

hybrid inflation and price level targeting in this paper we investigate the properties of monetary regimes that combine price level and inflation targeting we look both at an optimal control and at a simple rule characterisation of these regimes we derive numerical results by modelling the economy as a small scale open economy re model calibrated on uk data we conclude that 1 the relative merits of price level and inflation targeting as well as of mixes of these two depend on particular modelling and policy assumptions and 2 these merits do not always change gradually and or monotonically as we move from one regime to another

optimal monetary policy in a regime switching economy the response to abrupt shifts in exchange rate dynamics abstract this paper examines the trade offs that a central bank faces when the exchange rate can experience sustained deviations from fundamentals and occasionally collapse the economy is modelled as switching randomly between different regimes according to time invariant transition probabilities we compute both the optimal regime switching control rule for this economy and optimised linear taylor rules in the two cases where the transition probabilities are known with certainty and where they are uncertain the simple algorithms used in the computation are also of independent interest as tools for the study of monetary policy under general forms of asymmetric additive and multiplicative uncertainty an interesting finding is that policies based on robust minmax values of the transition probabilities are usually more conservative

monetary policy with uncertain parameters this thesis contains four chapters each of which examines different aspects of the uncertainty facing monetary policymakers monetary policy and market interest rates investigates how interest rates set on financial markets respond to policy actions taken by the monetary authorities the reaction of market rates is shown to depend crucially on market participants interpretation of the factors underlying the policy move these theoretical predictions find support in an empirical analysis of the u s financial markets predicting monetary policy using federal funds futures prices examines how prices of federal funds futures contracts can be used to predict policy moves by the federal reserve although the futures prices exhibit systematic variation across trading days and calendar months they are shown to be fairly successful in predicting the federal funds rate target that will prevailafter the next meeting of the federal open market committee from 1994 to 1998 monetary policy with uncertain parameters examines the effects of parameter uncertainty on the optimal monetary policy strategy under certain parameter configurations increasing uncertainty is shown to lead to more aggressive policy in contrast to the accepted wisdom should central banks be more aggressive examines why a certain class of monetary policy models leads to more aggressive policy prescriptions than what is observed in reality these counterfactual results are shown to be due to model restrictions rather than central banks being too cautious in their policy behavior an unrestricted model taking the dynamics of the economy and multiplicative parameter uncertainty into account leads to optimal policy prescriptions which are very close to observed federal reserve behavior

targeting nominal income growth or inflation within a simple new keynesian model emphasizing forward looking behavior of private agents i evaluate optimal nominal income growth targeting versus optimal inflation targeting when the economy is mainly subject to shocks that do not involve monetary policy trade offs for society inflation targeting is preferable otherwise nominal income growth targeting may be superior because it induces inertial policy making which improves the inflation output gap trade off somewhat paradoxically inflation targeting may be relatively less favorable the more society dislikes inflation and the more persistent are the effects of inflation generating shocks jel e42 e52 f58

international aid from the recipient perspective public or private good input assistance abstractthis article proposes a theoretical model from the recipient perspective that considers what type of assistance a donor country should provide public good assistance or private good assistance we investigate the effects of migration and free riders under both types of assistance we empirically apply this model to the rapidly growing economies and a large official development assistance disbursement for east asia

fairness risk preferences and independence impossibility theorems the most widely used economic models of social preferences are specified only for certain outcomes there are two obvious methods of extending them to lotteries if we do so by expected utility theory so that the independence axiom is satisfied our results imply that the resulting preferences do not exhibit ex ante fairness if we do so by replacing certain outcomes with their expected utilities for each individual so that individual risk preferences are preserved then ex ante fairness may be preserved but neither the independence axiom nor ex post fairness is satisfied both ex ante and ex post fairness can be satisfied but then the individual does not have well defined preferences over own lotteries

deception the role of uncertain consequences abstract we study how decisions to lie extend to risky environments we provide experimental evidence from a sender receiver game where there is uncertainty over the amount by which a sender s lie reduces its receiver s payoff which is known only to potential liar even though all reduction amounts are equiprobable ex post beliefs elicited from senders suggest that unlike truth tellers most liars underestimate the extent of the actual reduction in the receiver s payoff and appear to exploit this self serving bias resulting in substantially more lying relative to a baseline treatment without the uncertainty subsequent treatments confirm the bias by either providing additional evidence or by removing possible confounds an intervention treatment nudging senders toward correcting the bias reduces lying

is generosity involuntary abstract we estimate the distribution of exit reservation prices in a dictator game the mean exit reservation price equals 82 of the dictator game endowment and only 36 of subjects have exit reservation prices consistent with selfish or social preferences

the performance of forecast based monetary policy rules under model uncertainty we investigate the performance of forecast based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics we identify the key characteristics of rules that are robust to model uncertainty such rules respond to the one year ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia in contrast rules with longer forecast horizons are less robust and are prone to generating indeterminacy in light of these results we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences