money still makes the world go round the zonal view many leading monetary economists have come to regard the monetary aggregates as obsolete measures of the monetary policy stance this critique has led some to view money as having lost its central role in the conduct of monetary policy we say to those advocating excising money from monetary policy not so fast to better understand the potential role for money we develop a zonal view of monetary policy which reflects the historical regularity for the relative informativeness of the quantitative measures of monetary policy such as the monetary aggregates and real interest rates to depend on the inflation zone in which a central bank finds itself the zones range from high inflation zone 1 to deep deflation zone 5 with intermediate zones of moderate inflation zone 2 low inflation zone 3 and low deflation zone 4 we find considerable support for this view in the historical data which stretches back to the 19 th century seen from this perspective the past experience of central banks casts doubt on the singular importance often attributed to the short term real interest rate as an indicator of the stance of monetary policy this applies especially in the current low inflation environment in which many central banks find themselves the zonal view has far reaching implications for monetary policy frameworks for the analytical efforts to understand the monetary policy transmission mechanism and for central bank communication strategies this paper was prepared for the 21 st congress of the european economic association held in vienna on august 27 2006 the views expressed in the paper are solely those of the authors

models of stock returns a comparison in this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis fat tails and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis an alternative explanation for the observed fat tails is the symmetric student model the result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model for many years both financial economists and statisticians have been concerned with the description of stock market returns the form of the distribution of stock returns is a crucial assumption for mean variance portfolio theory theoretical models of capital asset prices and the prices of contingent claims for example understanding the behavior of the variance is essential to option pricing models empirical tests of asset pricing models and the efficient markets hypothesis draw statistical inferences that are also conditional on distributional assumptions the most convenient assumption for financial theory and empirical methods is that the distribution of security rates of return be multivariate normal with parameters that are stationary over time since the normal distribution is stable under addition any arbitrary portfolio of stocks will also be normally distributed with the additional assumption of risk aversion mean variance theory follows furthermore the assumptions of normality and parameter stationarity are required for most of the econometric techniques typically used in empirical research tests of the normality hypothesis on the daily returns of the dow jones industrial stocks by fama 121 revealed more kurtosis fatter tails than that predicted from a sample of independent and identically distributed normal variates fama concluded from this evidence that the distribution of price changes conforms better to the stable paretian distribution with characteristic exponent

money and the natural rate of interest structural estimates for the united states and the euro area abstract we examine the role of money in three environments the new keynesian model with separable utility and static money demand a nonseparable utility variant with habit formation and a version with adjustment costs for holding real balances the last two variants imply forward looking behavior of real money balances with forecasts of future interest rates entering current portfolio decisions we conduct a structural econometric analysis of the u s and euro area economies fiml estimates confirm the forward looking character of money demand a consequence is that real money balances are valuable in anticipating future variations in the natural interest rate

exchange rate policy and the zero bound on nominal interest rates in this paper we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero we compare two alternative proposals for ameliorating the effect of the zero bound an exchange rate peg and price level targeting we conduct this quantitative comparison in an empirical macroeconometric model of japan the united states and the euro area furthermore we use a stylized micro founded two country model to check our qualitative findings we find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy however price level targeting may be less effective under imperfect credibility because the announced price level target path is not directly observable

theoretical analysis regarding a zero lower bound on nominal interest rates this paper explores several issues concerning a possible zero lower bound zlb including its theoretical rationale the magnitude of effects of low sustained inflation on real interest rates the validity of analyzing monetary policy in models with no monetary variables and the dynamic stabilizing properties of taylor rules in a zlb context the most important argument however is that if the short nominal rate is immobilized at zero there nevertheless exists a route for monetary stabilization policy to be effective via the foreign exchange market its quantitative importance is examined in a calibrated optimizing open economy model

using a long term interest rate as the monetary policy instrument abstract using a short term interest rate as the monetary policy instrument can be problematic near its zero bound constraint an alternative strategy is to use a long term interest rate as the policy instrument we find when taylor type policy rules are used by the central bank to set the long rate in a standard new keynesian model indeterminacy that is multiple rational expectations equilibria may often result however a policy rule with a long rate policy instrument that responds in a forward looking fashion to inflation expectations can avoid the problem of indeterminacy

stabilizing expectations at the zero lower bound experimental evidence abstract our study demonstrates how agents expectations can interact dynamically with monetary and fiscal policy at the zero lower bound we study expectation formation near the zero lower bound using a learning to forecast laboratory experiment under alternative policy regimes in our experimental economy monetary policy targets inflation around a constant or state dependent target we find that subjects expectations significantly over react to stochastic aggregate demand shocks and historical information leading many economies to experience severe deflationary traps neither quantitatively nor qualitatively communicating the state dependent inflation targets reduce the duration or severity of economic crises introducing anticipated and persistent fiscal stimulus at the zero lower bound reduces the severity of the recessions when the recovery of fundamentals is sufficiently slow participants expectations become highly pessimistic and neither monetary nor fiscal policy are effective at stabilizing the economy

comment on endogenous objectives and the evaluation of targeting rules for monetary policy 1 four mccallum principles itis bothanprivilege andapleasureformetoparticipateinthisconferenceinhonorofbennettt mccallum henceforthbtm thus beforeproceedingtomakespeci c comments regarding carl walsh s elegant paper on endogenous objectivesand targeting rules i would like to begin by providing some context in light ofbtm snumerouscontributionstotheanalysisofmonetarypolicy forthispurpose itishelpfultohighlightfourbasicprinciplesofeffectivemonetarypolicythatbtmhas consistently emphasized over the past several decades given the logicalcoherencyandintuitiveappealofhisworkonthissubject itisonlynaturaltorefertothesefourpointsasthe mccallumprinciples the rstmccallumprincipleisthatmonetarypolicymatters thatis theconductof monetary policy can have important consequences for social welfare btmanalyzedthetheoreticalandempiricalunderpinningsofthisprincipleinaseriesof

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

regional size industrial location and input output expenditure coefficients mccann p and dewhurst j h ll 1998 regional size industrial location and input output expenditure coefficients reg studies 32 435 444 this paper develops some of the themes raised in a recent paper by flegg et al 1995 the question we explore is the relationship between the size of a region and the values of the expenditure coefficients as estimated using location quotients by using hypothetical examples we show that there is no theoretical relationship between regional size and the value of a regional expenditure coefficient the reason is that it depends on the spatial distribution of activity and industrial linkages on the other hand it would also appear that in many cases there does seem to be an empirical relationship and that this observation is worthy of further research mccann p et dewhurst j h ll 1998 taille des regions localisation industrielle et coefficients input output de depense reg studies 32 435 444 cet article developpe certaines des questions soulevees re

taylor rules and macroeconomic instability or how the central bank can preempt sunspot expectations this paper derives new results on the effects of employing taylor rules in economies that are subject to real market imperfections such as production externalities policies which respond to output movements can block sunspot equilibria that arise from the increasing returns the paper also finds that rules which should be chosen avoided in perfect market environments often yield ensure multiple unique rational expectations solutions in alternative settings therefore exact knowledge on the degree of market imperfection may be integral for robust policy advice

real implications of the zero bound on nominal interest rates if monetary policy succeeds in keeping average inflation very low nominal interest rates may occasionally be constrained by the zero lower bound the degree to which this constraint has real implications depends on the monetary policy feedback rule and the structure of price setting policy rules that make the price level stationary lead to small real distortions from the zero bound if policy imparts persistence into the inflation rate the real implications of the zero bound are large in the presence of backward looking price setting and small if prices are set to maximize profits

what does the bank of japan do to east asia abstract in recent policy debates some have argued that expansionary monetary policy in japan can increase real output in japan and in japan s neighbors while others have warned that it is a beggar thy neighbor policy in this paper we estimate structural vector autoregressions to assess the effects of japanese monetary policy shocks we find that the effects of japanese monetary policy shocks on macroeconomic variation in east asia have been modest and difficult to reconcile with the beggar thy neighbor view we estimate that the asian crisis was preceded by expansionary monetary policy shocks in japan but we fail to find support for the view that these shocks contributed to the crisis

direct effects of base money on aggregate demand theory and evidence abstract meltzer the transmission process working paper carnegie mellon university 1999a shows that real monetary base growth is a significant determinant of consumption growth in the us controlling for the short term real interest rate in this paper i show that the same property of base money holds for total output relative to trend or potential in both the us and the uk the standard optimizing is lm model cannot account for this result but i show that it can once the long term nominal interest rate is included in the money demand function because the long term real rate matters for aggregate demand the presence of the long term nominal rate in the money demand function increases the effect of nominal money stock changes on real aggregate demand when prices are sticky

water use in the spanish economy an input output approach against the background of the water limitations that often appear in spain the aim of this paper is to study the behaviour of the productive sectors of the spanish economy as direct and indirect consumers of water to that end we employ input output analysis with the particular methodology being based on the linkages analysis known as the hypothetical extraction method hem we have introduced three modifications to this method first the valuation is made in terms of water consumption secondly we obtain the components of the impacts of each block of activity into which the economy is divided with these components being described as the internal effect mixed linkage net or external backward linkage and net or external forward linkage thirdly this methodology is used to detect key sectors our results confirm the marked importance of the agriculture food and other services blocks as regards the direct and indirect consumption of water in general we also find that other services chemicals metals and electronics and agriculture blocks play an important role in explaining the consumption of drinking water moreover the hem analysis allows us to classify productive sectors according to their forward or backward linkage character in a way that is more precise than that permitted by earlier methods finally this methodology can be extended to other types of environmental pressures 2002 elsevier science b v all rights reserved

money and credit as means of payment abstract a stochastic economic environment is presented in which the mix of cash and resource costly credit used as means of payment is endogenous for reasonable values of the credit cost parameter velocity can be quite variable and sensitive to the nominal interest rate those parameter values also generate larger welfare costs of inflation than have been found previously and a sizable impact of inflation on real interest rates

the japanese deflation has it had real effects could it have been avoided has deflation contributed to the long lasting stagnation of the japanese economy could the bank of japan have stopped deflation by implementing a more expansionary monetary policy tentative answers are probably not to the first question and probably yes to the second question it is found that the total cost of deflation over the period 1995 2003 has been close to a 1 1 rate of lost gdp yet on the basis of statistical significance and robustness to specification choices this evidence is not compelling on the other hand the estimated positive linkage between nominal base money growth and inflation is significant and robust even given current economic conditions however in order to be inflationary monetary policy should have been more expansionary than what actually observed even since the launch of the quantitative easing in 2001

global policy at the zero lower bound in a large scale dsge model abstract this paper analyses whether fiscal policies can alleviate the effects of a global recession that drives interest rates to the zero lower bound additionally we study the benefits of international coordination the analysis is carried out using a dynamic general equilibrium model of the global economy eagle model we consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times in this setup we find significant non linearities in a zero lower bound situation that amplify the effects of fiscal shocks compared to the non zero lower bound case international coordination is helpful but does not play a major role in the results

the zero interest rate bound and the role of the exchange rate for monetary policy in japan in this paper we study the role of the exchange rate in conducting monetary policy in an economy with near zero nominal interest rates as experienced in japan since the mid 1990s our analysis is based on an estimated model of japan the united states and the euro area with rational expectations and nominal rigidities first we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in japan in terms of stabilizing output and inflation then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap finally we investigate the international consequences of these proposals

overcoming the zero bound on nominal interest rates with negative interest on currency gesell s solution an economy is in a liquidity trap when monetary policy cannot influence either real or nominal variables of interest a necessary condition for this is that the short nominal interest rate is constrained by its lower bound typically zero the paper considers two small analytical models one old keynesian the other new keynesian possessing equilibria where not only the short nominal interest rate but nominal interest rates at all maturities can be stuck at their zero lower bound when the authorities remove the zero nominal interest rate floor by adopting an augmented monetary rule that systematically keeps the nominal interest rate on base money including currency at or below the nominal interest rate on non monetary instruments the lower bound equilibria are eliminated thus allowing an economic system to avoid the trap or to escape from it this rule will involve paying negative interest on currency that is imposing a carry tax on currency an idea first promoted by gesell the administration costs associated with a currency carry tax must be set against the benefits of potentially lower shoe leather costs and lower menu costs which are made possible by the its introduction there are also output gap avoidance benefits from eliminating the zero lower bound trap

synchronized business cycles in east asia and fluctuations in the yen dollar exchange rate because many authors have proposed stimulating the ailing japanese economy by monetary expansion and yen depreciation we explore the repercussions of depreciating the yen against the dollar on the other east asian economies which largely peg to the dollar since 1980 economic integration among japan s neighbors china hong kong indonesia korea malaysia philippines singapore and thailand has intensified and except for china their business cycles have been highly synchronized these cycles have been closely linked to fluctuations in the yen dollar exchange rate through changes in their export competitiveness and inflows of foreign direct investment we show that a major yen devaluation would have a negative impact on incomes in other east asian economies and that it is not a sensible policy option for japan

determining output and inflation variability are the phillips curve and the monetary policy reaction function responsible i introduction the natural rate hypothesis that no long run trade off exists between inflation and unemployment has won over most macroeconomists a new trade off between the variability of inflation and the variability of output has lately attracted considerable attention instead of minimizing a weighted sum of the levels of inflation and unemployment the central bank s objective function minimizes a weighted sum of the variances of inflation and output given this loss function for the central bank a great deal of theoretical research has been undertaken as to which type of monetary policy rule is both efficient and robust clarida et al 1999 and an edited volume by taylor 1999b investigate various monetary policy rules in this article i explore the determinants of inflation and output variability first in a theoretical study i present the theoretical studies of taylor 1994 svensson 1997 and ball 1999a and investigate how the policy parameters in a taylor monetary policy reaction function are related to the variability of output and inflation computational experiments show that first as monetary policy makers increase their degree of responsiveness to inflation the variability of inflation falls but the variability of output increases second if policy makers increase their policy response to output gaps the variances of both inflation and output decrease in addition the experiments illustrate that the changes in the variability of output and inflation can be the result of changes in the responsiveness of prices to output gaps the second part of the article provides cross country evidence regarding the relationship of inflation and output variability to both the policy parameters of the monetary policy reaction function and the slope parameter of the phillips curve by analyzing data from 20 organisation for economic cooperation and development oecd countries this study estimates the parameters of the monetary policy reaction function and the slope parameter of the phillips curve and examines the relationships between the estimated parameters and the variability of output and inflation although there have been numerous empirical investigations of monetary policy reaction functions taylor 1999a clarida et al 2000 among others there is very little empirical evidence concerning a relationship between the parameters in the policy reaction function and the variability of output and inflation for several countries furthermore there is even less empirical literature that considers the relationship between the policy parameters and output and inflation variability in a cross country framework this study attempts to extend the empirical analysis to a group of countries by using international data 1 there are two main findings first inflation will be low and stable in countries where the monetary policy rule has large reaction coefficients and second output will have large fluctuations in countries where the phillips curve is relatively flat 2 the rest of this article is divided up into four sections section ii provides an overview of the taylor svensson ball tsb model the relationship between the model s parameter values and inflation and output variability is explored through simulations section iii describes the empirical data for the 20 oecd countries and reports the estimated parameters of the tsb model section iv presents the results of the cross country regressions used to evaluate the determinants of inflation and output variability finally section v offers conclusions ii the tsb model assumptions the tsb model describes the economy in three equations 1 sub t beta i sub t 1 pi sub t 1 r sup lambda sub t 1 u sub t 2 pi sub t pi sub t 1 alpha sub t 1 e sub t 3 i sub t pi

liquidity traps learning and stagnation we examine global economic dynamics under learning in a new keynesian model in which the interest rate rule is subject to the zero lower bound under normal monetary and fiscal policy the intended steady state is locally but not globally stable large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output to avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation in contrast policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

mcis and monetary policy abstract several central banks have recently adopted a monetary conditions index mci to guide monetary policy under floating exchange rates this paper discusses some analytical and practical questions raised by mcis furthermore using data for australia canada and new zealand which all operate monetary policy under floating rates and with an inflation target it estimates the responses of the central banks to exchange rate changes the results reveal clear differences between central banks while the reserve bank of australia does not appear to respond the bank of canada and the reserve bank of new zealand who use the mci as an operating target do respond quite strongly to movements in the exchange rate

assessing regional and global water footprints for the uk article i nfo the concept of the water footprint has been recently introduced as an important indicator for human induced water consumption the water footprint is defined as the total volume of water used during production and consumption of goods and services as well as direct water consumption by humans water is not only consumed directly but also indirectly in production processes therefore calculating the water footprint enables us to quantify total water consumed along the whole global supply chain in this paper we develop a regional input output io model extended by water consumption coefficients to quantify the respective domestic water footprint for different consumption categories for the south east and north east of england and the uk i e the water consumed directly and indirectly along the regional supply chain in addition we calculate the total water footprints which include both domestic water consumption and the water required in other countries to produce goods and services imported and consumed in the region under investigation through applying a multi regional input output mrio model both footprints also include households direct consumption of water with regards to the two regions we can observe a very pronounced regional disparity of regional domestic and total water footprints between the relatively water scarce south east and the water rich north east of england we find that the domestic water footprint per capita in the south east is 22 higher than the domestic water footprint per capita in the north east the key water consumers include agriculture food products electricity and gas production and hotel and catering the total water footprints per capita in the south east 1257 m 3 year are more than twice the ones in the north east 597 m 3

a model of monetary policy shocks for financial crises and normal conditions in their classic 1999 paper monetary policy shocks what have we learned and to what end christiano eichenbaum and evans cee investigate one of the most widely used methods for identifying monetary policy shocks of its time unfortunately their approach is no longer viable at least not in its original form a major problem stems from the recent behavior of two key variables in their model the fed funds rate and non borrowed reserves we develop a new identification scheme that remedies these diculties but maintains the basic cee framework our empirical specification is motivated by a standard new keynesian dsge model augmented by a simple financial structure the model provides theoretical support for variables we use in place of certain variables that were used in the classic var approach outlined in cee one significant innovation is our use of divisia m4 the broadest monetary aggregate currently available for the united states as the policy indicator variable we obtain four major empirical results that support the use of a properly measured broad monetary aggregate as the policy variable first policy shocks have significant eects on output and on the price level even when an interest rate is included in our model contradicting the new keynesian argument that monetary aggregates are redundant second we develop a model that is not subject to the output price or liquidity puzzles common to this literature contradicting the view that using the interest rate as the policy indicator generally yields more reasonable responses than a monetary aggregate third during normal conditions policy shocks from our divisia based model have similar eects on variables to those found in the fed funds model of monetary policy and where there are dierences our model with divisia m4 obtains results that are more consistent with standard economic theory fourth our preferred specification produces plausible responses to a monetary policy shock in samples that include or exclude the recent financial crisis

real balance effects and monetary policy i introduction modern literature on monetary policy rules employs new keynesian optimizing models that do not explicitly include monetary aggregates see e g rotemberg and woodford 1997 clarida et al 1999 taylor 1999 in these models the demand for output derives from the log linearization of the standard euler equation characterizing household s saving decisions the real money stock does not enter the is relation and therefore monetary policy affects output and inflation only through its effect on the real interest rate when the nominal interest rate is the policy instrument it is not necessary to specify a money market equilibrium condition see romer 2000 the practice of neglecting monetary aggregates in monetary policy analysis has recently been questioned by meltzer 1999 mccallum 2001 and nelson 2002 2003 in particular mccallum 2001 points out that although no explicit term involving money appears in the standard new keynesian setup long run inflation can still be pinned down by the economy steady state nominal money growth rate moreover mccallum 2000 2001 andres et al 2001 kremer et al 2003 woodford 2003 ireland 2004a and collard and dellas 2005 analyze the case in which the resources used by consumers in conducting transactions are modeled by a nonseparable function of consumption and real money balances meltzer 1999 2001 argues that changes in real monetary base generate effects on real aggregate demand not summarized by the real interest rate on short term securities nelson 2003 emphasizes the role of money in the transmission mechanism both as a proxy for a whole spectrum of rates of return and as an indicator variable which contains information about the state of the economy the main aim of the present article is to provide additional microfoundations for an explicit role for money in the current macroeconomic debate in particular i derive a real balance effect that explicitly enters the is relation within an optimizing general equilibrium framework of the new keynesian type according to de scitovszky 1941 haberler 1946 pigou 1943 and patinkin 1965 a change in real money balances has an impact on the real financial wealth of consumers and therefore affects consumption and output notably this effect is not considered in traditional models there is in fact empirical evidence showing that real monetary base growth is a significant determinant of consumption and output gap in both the united states and in the united kingdom see chari et al 1995 meltzer 1999 nelson 2002 the present article extends the dynamic stochastic new keynesian setup with money in the utility function by introducing overlapping generations as modeled by yaari 1965 and blanchard 1985 there are good reasons to base the demand side of the economy on a discrete time stochastic monetary version of the yaari blanchard model first this kind of extension allows one to maintain the main characteristics of the so called new neoclassical synthesis that is forward looking behavior of optimizing agents and incomplete nominal adjustment of prices featured in new keynesian theories goodfriend and king 1997 second the derivation of the real balance effect does not require nonseparability in the utility function thus the implications are analytically more tractable 1 third my framework is more general because it includes the immortal representative agent setup as a particular case my analysis attempts to examine whether the presence of an explicit real balance effect in the is relation helps evaluate the role for money in designing monetary policy rules i focus on basic issues concerning the design of monetary policy rules specifically i investigate whether it is necessary for monetary policy to overreact to inflation by raising the nominal interest rate by more than the observed increase in inflation to rule out equilibrium multiplicity

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

fixes of the forward discount puzzle regressions of ex post changes in floating exchange rates on appropriate interest differentials typically imply that the high interest rate currency tends to appreciate the forward discount puzzle using data from the european monetary system ems the authors find that a large part of the forward discount puzzle vanishes for regimes of fixed exchange rates that is deviations from uncovered interest parity appear to vary in a way that is dependent upon the exchange rate regime by using the many ems realignments the authors are also able to quantify the peso problem copyright 1996 by mit press

an input output model of water consumption analysing intersectoral water relationships in andalusia abstract this paper presents an input output model of sectoral water consumption created by combining the extended leontief input output model with the model of energy use developed by proops the analysis is applied to andalusia a region situated in the south of spain which is characterized by water shortage we determine which economic sectors consume the greatest quantities of water both directly and indirectly and to what extent this natural resource may become a limiting factor in the growth of certain production sectors the model allows us to distinguish between direct and indirect consumption thus offering the possibility of designing an economic and environmental policy oriented towards water saving additionally the model allows simulation of possible changes in water consumption caused by certain environmental measures as well as their consequences on the regional economy

the effectiveness of conventional and unconventional monetary policy evidence from a structural dynamic factor model for japan abstract i investigate the effectiveness of both conventional and unconventional japanese monetary policy measures targeting either the short term interest rate or the monetary base using a 1985 2014 data set covering 135 variables the analysis is based on a structural dynamic factor model an expansionary monetary policy shock identified via theoretically plausible sign restrictions is found to significantly increase real and nominal economic activity with regard to the policy instrument its effectiveness differs a shock that decreases the short term interest rate has a strong positive effect on output and a modest effect on prices a monetary policy shock that raises the monetary base has a positive but weak and rather transitory effect on output and a strong effect on goods and stock prices

central bank learning terms of trade shocks and currency risk should only inflation matter for monetary policy this paper examines the role of interest rate policy in a small open economy subject to terms of trade shocks and time varying currency risks the private sector makes optimal decisions in an intertemporal non linear setting with rational forward looking expectations in contrast the monetary authority chooses an optimal interest rate reaction function given a loss function that is conditional on the state of the economy and given its least squares learning about the evolution of inflation and exchange rate depreciation the simulation results of the effects of different policy scenarios on welfare show that on balance the preferred stance should be strict inflation targeting

the taylor principle and monetary policy approaching a zero bound on nominal rates quantile regression results for the united states and japan this paper offers a new approach that estimates the response of interest rates to inflation and the output gap at various points quantiles on the conditional distribution of interest rates this offers an improvement on empirical estimates conducted only at the mean and also allows us to test the propositions that policy shows greater aggression to inflation in the reaction function in terms of a greater response coefficient as interest rates reach low levels and increasing aggression as the lower bound is approached we find support for the taylor principle a more aggressive response to inflation than under a taylor rule but no detectable evidence of increasing aggression as the zero lower bound is approached in the us and japan

sluggish inflation and optimizing models of the business cycle abstract many researchers have added sticky prices to quantitative business cycle models i simulate several of these models in order to evaluate their success at reproducing two features of us data the lagged reaction of inflation to monetary growth and the persistence of inflation

the effects of foreign shocks when interest rates are at zero in a two country dsge model the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound on policy interest rates this result applies even to countries that are relatively closed to trade such as the united states departing from many of the existing closed economy models the duration of the liquidity trap is determined endogenously adverse foreign shocks can extend the duration of the trap implying more contractionary effects for the home country the home economy is more vulnerable to adverse foreign shocks if the neutral rate is low consistent with secular stagnation and trade openness is high

a theoretical approach to sterilized foreign exchange intervention in this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions we identify three main strands of literature 1 that which deems interventions futile 2 that which requires some market friction i e limited arbitrage in order for interventions to be effective and 3 that which advocates the use of interventions as long as they convey signals on the stance of future monetary policy we contribute to the literature in three important ways first by reviewing new theoretical models that have surfaced within the last decade second by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct and third by only focusing on sterilized operations which allows us to sidestep the effects induced by changes in the stock of money supply in addition the models that we present comprise both a macro and microstructure approach so as to provide a comprehensive view of the theory behind exchange rate intervention

insider trading abnormal return and preferential information supervising through a probabilistic model abstract the enforcement of the ban on insider trading requires an evaluation of the disgorgement i e the capital gain of the insider trader who takes advantage of the exploitation of preferential information an initial step forward on this topic has been taken by the sec the united states securities and exchange commission which has developed a quantitative procedure based on the event study methodology this paper develops an adaptation of this procedure for the italian market and explains the limits of these methodologies in the analysis of the insider trading phenomenon in particular it emerges that the econometric approach cannot be applied to all insider trading schemes in fact in order to work out statistically significant results it relies on a series of assumptions such as the existence of a robust reference market index or the availability of long time series data for this reason a new procedure for computing the economic value of the information exploited by the insider based on a probabilistic approach has also been developed this methodology overcomes the issues connected to the event study procedure and can be applied by construction to all insider trading schemes and not only to the simplest ones in fact the model parameters are defined by using the trading strategy of the single insider thus if insider trading takes place the model is able to offer a disgorgement computation hence by hypotheses of its construction it is able to detect the difference between insiders and followers the new procedure has been adopted by consob and has been presented to the judicial system which is in charge of inflicting the fine

money s role in the monetary business cycle a small structural model of the monetary business cycle implies that real money balances enter into a correctly specified forward looking is curve if and only if they enter into a correctly specified forward looking phillips curve the model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation maximum likelihood estimates of the modelos parameters take both these considerations into account but still suggest that money plays a minimal role in the monetary business cycle

a test of perfect substitutability in the foreign exchange market i motivations for the test the question of whether or not domestic bonds are perfect substitutes for foreign bonds in investors portfolios implying that the expected rates of returns must be equalized across currencies is an important one for two reasons the question is crucial first for choosing among various asset market models of exchange rate determination and second for evaluating tests of efficiency in the forward exchange market to illuminate the first motivation a brief discussion of models of exchange rate determination is necessary all asset market models share the assumption that there are no significant transactions costs capital controls or other impediments to the international flow of capital thus actual portfolios adjust instantaneously to equal desired portfolios this implies for example covered interest parity the domestic interest rate should differ from the foreign interest rate by an amount exactly equal to the forward discount rate perfect substitutability between domestic and foreign bonds is the stronger assumption that market participants are indifferent as to the currency composition of their portfolio it implies uncovered interest parity the domestic interest rate must differ from the foreign interest rate by an amount exactly equal to the expected rate of depreciation the perfect substitutability assumption is far from standard in fact exchange rate models within the asset market view can be classified into those that belong to the monetary approach defined by the assumption of perfect substitutability and those that belong to the portfolio balance approach defined by the assumption of imperfect substitutability in the portfolio balance approach investors hold well defined proportions of their wealth in the form of each country s assets with the proportions depending on the expected rates of return as in equation 1

central bank communication and the liquidity trap central bank communication plays an important role in shaping market participants expectations this paper studies a simple nonlinear model of monetary policy where agents have incomplete information about the economic environment it shows that agents learning and the dynamics of the economy are heavily affected by central bank s transparency about its policy rule a monetary authority that does not communicate its rule can induce learning equilibria where the economy experiences prolonged periods of deflation and slow growth more generally small expectational errors can result in complex economic dynamics inducing welfare reducing fluctuations on the contrary central bank communication helps stabilizing expectations around the inflation target equilibrium

escaping from a liquidity trap and deflation the foolproof way and others existing proposals to escape from a liquidity trap and deflation including my foolproof way are discussed in the light of the optimal way to escape the optimal way involves three elements 1 an explicit central bank commitment to a higher future price level 2 a concrete action that demonstrates the central bank s commitment induces expectations of a higher future price level and jump starts the economy and 3 an exit strategy that specifies when and how to get back to normal a currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations furthermore an intentional currency depreciation and a crawling peg as in the foolproof way can implement the optimal way and in particular induce the desired expectations of a higher future price level i conclude that the foolproof way is likely to work well for japan which is in a liquidity trap now as well as for the euro area and the united states in case either would fall into a liquidity trap in the future

monetary policy rules in a new keynesian euro area model the first part of this paper is devoted to describe a new keynesian model which after calibration shows a great fit on euro area macroeconomic data then the stabilizing properties of alternative monetary policy rules are evaluated for consideration of the european central bank ecb our main finding is that a simple rule that provides the reaction of the nominal interest rate to price inflation wage inflation and its previous observation can fairly well approximate the optimal monetary policy this result is robust to including an ecb preference on interest rate smoothing

optimal monetary policy at the zero interest rate bound what should a central bank do when faced with a weak aggregate demand even after reducing the short term nominal interest rate to zero to address this question we solve a central bank s intertemporal loss minimization problem in which the non negativity constraint on nominal interest rates is explicitly considered we find that the optimal path is characterized by policy inertia in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level by making such a commitment the central bank is able to achieve higher expected inflation lower long term nominal interest rates and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady state level

the future of monetary aggregates in monetary policy analysis this paper considers the role of monetary aggregates in modern macroeconomic models of the new keynesian type the focus is on possible developments of these models that are suggested by the monetarist literature and that in addition seem justified empirically both the relation between money and inflation and between money and aggregate demand are considered regarding the first relation it is argued that both the mean and the dynamics of inflation in present day models are governed by money growth this relationship arises from a conventional aggregate demand channel claims that an emphasis on the link between monetary aggregates and inflation requires a direct channel connecting money and inflation are wide of the mark the relevance of money for aggregate demand in turn lies not via real balance effects or any other justification for money in the is equation but on money s ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand this role for monetary aggregates which is supported by empirical evidence enhances the value of money to monetary policy

a general distribution for describing security price returns this paper introduces a generalized distribution called the gb2 distribution for describing security returns the distribution is extremely flexible containing a large number of well known distributions such as the lognormal log t and log cauchy distribu tions as special or limiting cases and allowing large even infinite higher moments this flexibility allows a direct representation of different degrees of fat tails in the distribution the properties of the gb2 make it useful in empirical estimation of security returns and in facilitating the development of option pricing models and other models that depend on the specification and mathematical manipulation of distributions copyright 1987 by the university of chicago

monetary policy and the zero bound to interest rates a review1 this paper reviews the literature on what the zero bound to nominal interest rates implies for the conduct of monetary policy the aim is to evaluate the risks of hitting the zero bound and to evaluate policies that are said to be able to reduce that risk or policies that are proposed as means of helping the economy escape if it is in a zero bound trap i conclude that policies aimed at cure are arguably more uncertain tools than those aimed at prevention so prevention is a less risky strategy for policymakers but since the risks of hitting the zero bound seem quite small anyway and the risks of encountering a deflationary spiral smaller still it is conceivable that inflation objectives that typify modern monetary regimes already have more than enough insurance built into them to deal with the zero bound problem

modelling money demand for a panel of eight transitional economies in this article we estimate money demand functions for a panel of eight transitional economies using quarterly data for the period 1995 01 1995 to 2005 03 we find that real m1 and real m2 and their determinants namely real income and short term domestic interest rate are cointegrated both for individual countries as well as for the panel long run elasticities suggest that consistent with theory real income positively and nominal interest rate negatively impact real money demand our test for panel granger causality suggests short run bidirectional causality between m1 and m2 and their determinants finally our tests for stability of the money demand functions reveal more cases of unstable money demand functions when m2 is used as a proxy for money demand

the effectiveness of alternative monetary policy tools in a zero lower bound environment this paper reviews alternative options for monetary policy when the shortterm interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates we use a model of risk averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level slope and curvature term structure risk we find that these treasury factors historically were quite helpful for predicting both yields and excess returns over 1990 2007 the historical correlations are consistent with the claim that if in december 2006 the fed were to have sold off all its treasury holdings of less than 1 year maturity about 400 billion and use the proceeds to retire treasury debt from the long end this might have resulted in a 14 basis point drop in the 10 year rate and an 11 basis point increase in the 6 month rate we also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009 our estimates imply that at the zero lower bound such a maturity swap would have the same effects as buying 400 billion in long term maturities outright with newly created reserves and could reduce the 10 year rate by 13 basis points without raising short term yields

empirical analysis of the exchange rate channel in japan abstract this paper analyzes the significance of the exchange rate channel one of the transmission mechanisms of monetary policy it is important to evaluate this channel for japan because yen depreciation has been proposed as a policy to move the economy out of a liquidity trap our results suggest that in the past monetary expansion resulted in yen depreciation in the long and short run however there is no evidence to support the view that yen depreciation facilitated economic growth therefore we conclude that use of the exchange rate as a mechanism to boost the real economy was in our sample period at least premature

the macroeconomics of trend inflation most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state but most central banks target an inflation rate of about 2 percent many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy in this survey we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers we first review empirical research on the evolution and dynamics of u s trend inflation and some proposed new measures to assess the volatility and persistence of trend based inflation gaps we then construct a generalized new keynesian model that accounts for a positive trend inflation in this model an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations this analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long run inflation target jel e12 e31 e32 e52 e58

an extension of the black scholes model of security valuation abstract this paper provides a formula for the market value of a security whose dividends and liquidation value depend on securities with diffusion dividend and price processes the solution is in terms of the feynman kac formula solving the partial differential equation determining the derivative sucurity s unique arbitrage free value the interest rate process may be stochastic markets need not be dynamically complete

have we underestimated the likelihood and severity of zero lower bound events prior to the financial crisis most economists probably did not view the zero lower bound zlb as a major problem for central banks using a range of structural and statistical models we find that previous research understated the zlb threat by ignoring uncertainty about model parameters and latent variables focusing too much on the great moderation experience and relying on structural models whose dynamics cannot generate sustained zlb episodes our analysis also suggests that the federal reserve s asset purchases while materially improving macroeconomic conditions did not prevent the zlb constraint from having first order adverse effects on real activity and inflation