effects of indirect taxation in a mixed oligopoly abstract in a mixed oligopoly an increase in tax ad valorem or specific does not change total output but increases the output of the public firm and the tax revenue also privatization may increase both tax revenue and welfare

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

consumption externalities and monetary policy with limited asset market participation this article explores the interaction between consumption externalities and limited asset market participation lamp in the standard new keynesian model we assess the performance of simple taylor type interest rate rules with respect to a equilibrium determinacy b the model s ability to simultaneously generate output and inflation volatility similar to the pre volcker era and c the model s response to a technology shock we find that when individual preferences are affected by average household consumption aggregate consumption externality stronger externalities increase the range of lamp for which multiple equilibria arise even if the policy rule satisfies the taylor principle the interaction of lamp and externalities can generate vast inflation output relative volatility in line with the one observed in the data in the 1970s according to our analysis consumption externalities also affect the responses of endogenous variables to total factor productivity shocks jel e4 e5

the taylor principle fights back part ii abstract the existing literature holds that the taylor principle often leads to indeterminacy in new keynesian models that allow for capital accumulation and limited asset market participation this conclusion is special however to the case of continuous full employment when the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously determinacy is the norm the threat of indeterminacy is limited to a tiny irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast everywhere else the taylor principle guarantees a unique rational expectations equilibrium the dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market

fiscal requirements for dynamic and real determinacies in economies with private provision of liquidity a monetarist assessment we study the impact of fiscal policies on the inherent links between inflation unemployment and asset prices in an environment where firms provide liquidity and the central bank follows a constant money growth rate rule firms other than hiring workers also supply private assets that are not only useful as a store of value but also as collateral when firms are not taxed and public debt is scarce the economy is non ricardian so that real indeterminacies can be observed moreover labor market characteristics do not affect the demand for government liabilities however when agents face public and private asset scarcity labor market conditions then impact asset prices and inflation we further show that irrespective of the type of asset scarcity agents face when firms are taxed non ad valorem not only the level of tax revenues but also its composition matter for real allocations moreover we show that labor market conditions directly affect the dynamics of all government liabilities and inflation

performance of monetary policy with internal central bank forecasting abstract recent models of monetary policy have analyzed the desirability of different optimal and ad hoc interest rules under the restrictive assumption that forecasts of the private sector and the central bank are homogeneous this paper studies the implications of heterogeneity in forecasting by the central bank and private agents for the performance of interest rules in a framework of econometric learning

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

equilibrium indeterminacy and asset price fluctuation in japan a bayesian investigation this paper investigates sources of asset price fluctuation in japan using an estimated financial accelerator model for explicit treatment of expectational beliefs characterized by sunspots the model is analyzed over the parameter space where the equilibrium can be indeterminate we show that indeterminacy arises if the financial accelerator effect is sufficiently large according to our bayesian estimation results japan s economy was affected by sunspot shocks however the contribution of the sunspots to asset price volatility was low rather net worth and cost shocks drove the asset price fluctuation we find however that the sunspots substantially affected capital investment

monetary policy learning and the speed of convergence under the assumption of bounded rationality economic agents learn from their past mistaken predictions by combining new and old information to form new beliefs the purpose of this paper is to investigate how the policy maker by affecting private agents learning process determines the speed at which the economy converges to the rational expectation equilibrium i find that by reacting strongly to private agents expected inflation a central bank increases the speed of convergence and shortens the length of the transition to the rational expectation equilibrium i use speed of convergence as an additional criterion for evaluating alternative monetary policies i find that a fast convergence is not always desirable

timing and real indeterminacy in monetary models an increasingly common approach to the theoretical analysis of monetary policy is to ensure that a proposed policy does not introduce real indeterminacy and thus sunspot fluctuations into the model economy policy is typically conducted in terms of directives for the nominal interest rate this paper uses a discrete time money in the utility function model to demonstrate how seemingly minor modifications in the trading environment result in dramatic differences in the policy restrictions needed to ensure real determinacy these differences arise because of the differing pricing equations for the nominal interest rate

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

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

monetary and fiscal policy interactions in the post war u s abstract a new keynesian model allowing for an active monetary and passive fiscal policy ampf regime and a passive monetary and active fiscal policy pmaf regime is estimated to fit various u s samples from 1955 to 2007 the results show that data in the pre volcker periods strongly prefer an ampf regime even with a prior centered in the pmaf region the estimation however is not very informative about whether the federal reserve s reaction to inflation is greater than one in the pre volcker period because much lower values can still preserve determinacy under passive fiscal policy in addition whether a pmaf regime can generate consumption growth following a government spending increase depends on the degree of price stickiness an income tax cut can yield an unusual negative labor response if monetary policy aggressively stabilizes output growth

allowing the data to speak freely the macroeconometrics of the cointegrated vector autoregression all economists agree that reality is complex and that the tools with which we confront it are far simpler theorists sometimes deal with this gap by asking very little of the data start with the stylized facts and develop relatively sim ply theories to account for them unfortunately stylized facts are often too stylized to discrimi nate among plausible candidate theories or to provide a basis for accurate quantification alternative approaches start from the other end and ask much of the data one european tra dition which derives from trygve haavelmo s the probability approach in econometrics 119442 focuses on obtaining good character izations of data before testing and on drawing out the implications of data that ought to con strain economic theorizing the application of the cointegrated vector autoregression 1cvar2

expectations and the stability problem for optimal monetary policies eine auf den fundamentaldaten beruhende regelbindung der geldpolitik ohne selbstverpflichtung die bei vollkommen rationalen erwartungen der privaten akteure optimal ware ist instabil wenn diese akteure de facto den ublichen regeln des adaptiven lernens folgen dieses problem lasst sich dadurch beheben dass die erwartungen privater akteure berucksichtigt und in geeigneter weise in die optimale geldpolitik einbezogen werden diese eindeutige schlusfolgerung gilt auch dann wenn sich der geldpolitische entscheidungstrager und die privaten akteure in einem simultanen lernprozess befinden unsere ergebnisse zeigen wie wichtig es ist die geldpolitik angemessen zu gestalten und dabei nicht nur die fundamentaldaten sondern auch direkt die beobachteten erwartungen privater haushalte und unternehmen zu berucksichtigen

monetary policy inertia more a fiction than a fact abstract empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia this evidence is very hard of reconcile with the alternative evidence of low predictability of monetary policy rates in this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by taylor 1993 discretion versus policy rules in practice canergie rochester conference series on public policy 39 195 214 after appropriately diagnosing and taking care of the weak instruments problem we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules

monopsony with nominal rigidities an inverted phillips curve with nominal wage rigidities it is crucial to distinguish whether wages are set by workers or firms whether we have monopoly or monopsony power this paper provides a model of monopsony power in the labour market and a monopsonistic phillips curve if wages are set by firms who face nominal rigidities and there is inflation firms cannot adjust their wages fully the real wage falls and labour supply hence output decreases this provides a phillips curve where the output gap is negatively correlated with wage inflation in such a world monetary policy affects the intertemporal labour supply while the phillips curve is a labour demand curve interest rate cuts reduce the labour supply instead of boosting demand they are contractionary

monetary policy stock prices and consumption externalities abstract we study interest rate rules responding to stock prices in a sticky price sticky wage new keynesian framework subject to consumption externalities for given wage rigidity such rules are beneficial to equilibrium determinacy if households preferences feature sufficiently strong keeping up with the joneses externalities

some implications of learning for price stability abstract survey data on expectations of a range of macroeconomic variables exhibit low frequency drift in a new keynesian model consistent with these empirical properties optimal policy in general delivers a positive inflation rate in the long run two special cases deliver classic outcomes under rational expectations as the degree of low frequency variation in beliefs goes to zero the long run inflation rate coincides with the inflation bias under optimal discretion for non zero low frequency drift in beliefs as households become highly patient valuing utility in any period equally the optimal long run inflation rate coincides with optimal commitment price stability is optimal the optimal state contingent response to cost push disturbances similarly reflects properties of optimal discretion and optimal commitment depending on the degree of low frequency variation in beliefs when beliefs exhibit substantial variation in response to short run forecast errors optimal policy is closer to commitment

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

monetary policy transmission in a model with animal spirits and house price booms and busts abstract can monetary policy trigger pronounced boom bust cycles in house prices and create persistent business cycles we address this question by building heuristics into an otherwise standard dsge model as a result monetary policy sets off waves of optimism and pessimism animal spirits that drive house prices that in turn have strong repercussions on the business cycle we compare our findings to a standard model with rational expectations by means of impulse responses we suggest that a standard taylor rule is not well suited to maintain macroeconomic stability instead an augmented rule that incorporates house prices is shown to be superior

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

input tariffs duty drawbacks and tariff reforms abstract this paper provides a systematic analysis of the effects of input tariffs and duty drawbacks on welfare the paper arrives at two broad conclusions first tariffs on inputs unaccompanied by duty drawbacks on exports have an ambiguous effect on welfare second increases in tariffs on inputs complemented by full duty drawbacks are welfare improving up to a point provided goods exhibit substitutability in production as well as consumption the latter conclusion is reinforced by the presence of a revenue constraint

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

does the real interest parity hypothesis hold evidence for developed and emerging markets we present empirical evidence on the real interest parity hypothesis for a set of emerging and developed countries this is done by carrying out a set of unit root tests on the real interest differentials with respect to the us our results support the hypothesis of a rapid reversion towards a zero differential for developed countries and towards a positive one for emerging markets mean reversion is faster for emerging market economies we also find that this adjustment tends to be highly asymmetric and markedly different for developed and emerging markets our evidence reveals a high degree of market integration for developed countries and highlights the importance of risk premia for emerging markets

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

inflation determination with taylor rules is new keynesian analysis critically flawed abstract cochrane 2007 has strongly questioned the basic economic logic of current monetary policy analysis arguing that new keynesian nk models imply rational expectations paths with explosive inflation that do not imply explosions in real variables relevant for transversality conditions consequently the usual logic does not rule out solutions with explosive inflation that result does not however justify negative conclusions about nk analysis for a different criterion is logically satisfactory it is that to be plausible a re solution must satisfy the property of least squares learnability adoption of this criterion serves to justify in principle the bulk of current mainstream analysis

learning and price volatility in duopoly models of resource depletion the aim of this paper is to provide a theoretical model that can account for price fluctuations in depletable resource markets we do so by introducing learning into a hotelling style duopoly model of optimal resource depletion before the depletable resource becomes scarce the self confirming equilibrium of the model mirrors noncooperative rational expectations equilibrium in that supply is high and price is low although learning does induce occasional upward price spikes that are followed by a long period of falling price once the depletable resource becomes scarce the dynamics of the market change significantly with the self confirming equilibrium mirroring the cooperative rather than noncooperative rational expectations equilibrium supply is low and price is high price spikes still occur but against a background of increasing prices when scarcity is sufficient then the market is permanently in a self confirming equilibrium that is equivalent to cooperative rational expectations equilibrium

convergence of least squares learning in environments with hidden state variables and private information we study the convergence of recursive least squares learning schemes in economic environments in which there is private information the presence of private information leads to the presence of hidden state variables from the viewpoint of particular agents by applying theorems of ljung we extend some of our earlier results to characterize conditions under which a system governed by leastsquares learning will eventually converge to a rational expectations equilibrium we apply insights from the learning results to formulate and compute the equilibrium of a version of townsend s model

government debt learning and the term structure abstract does a change in the public s holdings of government debt affect the term structure of interest rates empirical analysis using a var model indicates that a rise in these holdings of the real debt to gdp ratio increases both the three month and ten year u s nominal yields in a statistically significant manner the maturity composition of debt is also found to matter innovations in holdings of long term debt affect the term structure while increases in short term debt affect inflation expectations these effects of changes in holdings of debt on the yield curve can be derived in a general equilibrium model in which the government issues exponentially maturing riskless debt financed by lump sum taxes and the optimizing agents are adaptive learners on calibrating the average maturity of debt in the model to match that of u s treasury debt since the 1980s i find that positive innovations in government debt lead to increases in asset yields this is because agents do not learn the principle of ricardian equivalence exactly and perceive increases in holdings of government bonds as a rise in their net wealth imposing rational expectations on the agents eliminates this channel and changes in holdings of government debt have no effect on yields the learning model also implies that as the real debt to gdp ratio increases and the average maturity of debt becomes longer the agents become less likely to learn that ricardian equivalence holds

monetary policy judgment and near rational exuberance we study how the use of judgement or add factors in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods we examine the possibility of a new phenomenon which we call exuberance equilibria i n the new keynesian monetary policy framework inclusion of judgement in forecasts can lead to self fulfilling fluctuations in a subset of the determinacy region we study how policymakers can minimize the risk of exuberance

trade liberalization and domestic monopoly a welfare analysis this paper uses a partial equilibrium analysis to show that a partial trade liberalization may reduce a country s welfare due to a loss in monopolistic rent if it is carried out by a quota the quota can be set by either the foreign or domestic government it is considered as a voluntary export restraint if it is set by the foreign government the quota rents in the case of a voluntary export restraint are captured by the foreign agent therefore the reduction in the domestic country s welfare is more likely in this case rather than in the case of the quota set by the domestic government copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

time varying consumer disagreement and future inflation abstract the inflation expectations of over 285 thousand consumers are used to develop model free estimates of the monthly cross sectional mean dispersion asymmetry and extremeness of inflation expectations from 1995 to 2016 the moments provide a novel and direct measure of time varying consumer disagreement about prices i find that the higher order cross sectional moments of inflation expectations are highly informative about future inflation in contrast to popular assumptions these moments do not appear to be noise even after accounting for historical economic data the unanticipated components of the higher order moments are significantly associated with future inflation in effect the higher order moments are neither noise nor conventional economic news the results have significant implications for the widespread practice of trimming inflation expectations data the results also have implications for the study of information rigidities indicating that consumer inflation expectations broadly reflect two types of consumers the first type update their information set at a much faster rate than is typically estimated or assumed the second type have very high information rigidities and only update their information set in response to major economic events

on the revenue implications of trade liberalization under imperfect competition abstract in a recent paper mujumder mujumder s 2004 revenue implications of trade liberalization under imperfect competition economics letters 82 83 89 argued that only if the industry is a monopoly we could be certain that the government could use profit tax to make up any shortfall in tariff revenue and also make the consumers and producers better off we show that this result is not robust when the products are differentiated we find that there always exists degree of product differentiation such that the government can achieve this goal for any finite number of firms so the picture is not so dismal as shown by mujumder

does the reserve bank of australia follow a forward looking nonlinear monetary policy rule abstractthe conventional monetary policy rule describes a simple linear relationship between the domestic interest rate inflation rate and output gap an important extension to this rule is to inc

another weakness of determinacy as a selection criterion for rational expectations models abstract this paper argues against determinacy as a guide to interpret rational expectations solutions using an example in which a determinate solution exists but differs sharply in dynamic behavior from that implied by the model considered on a sector by sector basis

do real balance effects invalidate the taylor principle in closed and open economies this paper examines the determinacy implications of forecast based monetary policy rules that set the interest rate in response to expected future inflation in a neo wicksellian model that incorporates real balance effects we show that the presence of such effects in closed economies restricts the ability of the taylor principle to prevent indeterminacy of the rational expectations equilibrium the problem is exacerbated in open economies particularly if the policy rule reacts to consumer price rather than domestic price inflation however determinacy can be restored in both closed and open economies with the addition of monetary policy inertia

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

international parity relationships between germany and the usa revisited evidence from the post dm period in this study we show the interrelation of the purchasing power parity and the uncovered interest rate parity between the us and germany for the recent period running from 1999 01 to 2014 04 this study extends the literature by testing both hypotheses simultaneously in a multivariate ecm this has the advantage that interactions between capital and goods markets can be considered simultaneously our finding of two long run relationships between the variables shows that a disequilibrium in one of the two markets leads to a disequilibrium in the other while analysing the reaction to cumulative shocks we show that us variables have a greater impact on german variables than vice versa therefore the rising importance of the euro and the increased integration of the european union in the recent decade have not changed this relation

regime switches agents beliefs and post world war ii u s macroeconomic dynamics the evolution of inflation and output over the last 50 years is examined through the lens of a micro founded model that allows for changes in the behavior of the federal reserve and in the volatility of structural shocks agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy the results support the view that there were regime switches in the conduct of monetary policy however the behavior of the federal reserve is identified by repeated fluctuations between a hawk and a dove regime instead of by the traditional pre and post volcker structure counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative chairman inflation would not have reached the peaks of the late 70s and the inflation output trade off would have been less severe these beliefs counterfactuals are new in the literature finally the paper provides a bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with markov switching regimes

win win indirect tax reform abstract the literature on tariffs and that on commodity taxes have established sufficient conditions under which tariff or commodity tax reform improves welfare since less developed countries need to raise certain revenue from indirect taxation we consider a policy reform within the complete indirect tax structure i e an increase in consumption taxes combined with a decrease in tariffs that improves welfare and raises government revenue we demonstrate that when uniform reductions in trade taxes accompany offsetting increases in consumption taxes so that consumer prices remain constant welfare improves and government revenue increases if the initial position provides a net subsidy to producers

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

monetary policy and asset prices with belief driven fluctuations abstract we present a heterogeneous agents new keynesian model subject to a cost channel of monetary policy transmission constant turnover between long time traders and newcomers in market activities combined with restricted trading opportunities introduces a feedback from the stock market to real activity making stock prices non redundant for the business cycle we show that strict inflation targeting can lead to equilibrium indeterminacy even if the policy rule satisfies the taylor principle a belief driven shock to stock price generates relative volatilities of key financial variables which are very close to what is observed in u s data this result hints to the possibility that the financial instability witnessed since the mid to late 1990s was the result of waves of rational exuberance and pessimism in financial markets our analysis suggests that a mild response to stock prices in the central bank s policy rule can restore equilibrium determinacy and therefore rule out non fundamental volatility

the lucas critique policy invariance and multiple equilibria the lucas critique of econometric policy evaluation argues that the parameters of econometric models are subject to theoretical cross equation restrictions which follow from the fact that the endogenous variables of the models are chosen optimally by forward looking agents in this paper i argue that these facts alone are insufficient to generate such restrictions i present an example of a model in which there exist multiple stationary rational expectations equilibria one of which is supported by a process invariant forecast rule immunity to the lucas critique is proposed as a selection criterion in models with multiple equilibria

financial factors and monetary policy determinacy and learnability of equilibrium abstract we contribute to the debate on whether central banks should respond to financial factors in monetary policy rules by evaluating equilibrium determinacy and e stability in the presence of a financial accelerator policies responding to lagged asset prices either reduce the region of determinacy or e stability in the parameter space however a response to current asset prices expands both regions of determinacy and e stability policy rules reacting to credit volume constrict the determinacy region most policies responding to credit spreads expand determinacy and e stability regions we favor the inclusion of current asset prices or credit spreads in monetary policy rules

trade liberalization and tax reform strategies the case of the korean oil industry abstract the decline in government revenues due to tariff reductions has become a major concern for most developing countries including korea this paper focuses on the korean oil industry to examine which post trade liberalization tax reform strategy is optimal depending on the government s priority between social welfare and government revenue we find that the important factors for choosing an optimal tax reform policy are price elasticity of demand and market competition based on a price inelastic demand and the low competitive market for korea s oil industry if the goal of a tax reform policy is to increase social welfare the recommended strategy is to raise the consumption tax by a scale of less than the sum of tariff cuts times the crude oil price and oil import tax cuts this strategy would also reduce inflation but it could be detrimental to government revenue however if the policy s goal is the preservation of government revenue the recommended strategy is to raise the consumption tax by a scale equal to the sum of tariff cuts times the crude oil price at the pre tax reform and oil import tax cuts this strategy does not change either government revenue or social welfare

real time rational expectations and indeterminacy abstract this paper uses the technique of lubik and schorfheide lubik t schorfheide f 2004 testing for indeterminacy an application to u s monetary policy the american economic review 94 1 190 217 to test for indeterminacy in a new keynesian model using real time instead of revised data on the output gap the results suggest indeterminacy both before 1979 and after 1982

shifting endpoints in the term structure of interest rates abstract this paper links the term structure to perceptions of monetary policy long horizon forecasts of short rates required by no arbitrage term structure models are heavily influenced by the endpoints or limiting conditional forecasts of the short rate process common assumptions that the short rate is mean reverting or contains a unit root are shown to generate unrealistic yield predictions failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation this paper links endpoint shifts to agent learning about shifts in long term policy goals shifting endpoints in short rate processes significantly improve yield predictions

does ricardian equivalence hold when expectations are not rational this paper considers the ricardian equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules we show that ricardian equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied however new cases of failure can also emerge under learning in particular for ricardian equivalence to obtain agents expectations must not depend on government s financial variables under deficit financing

output persistence from monetary shocks with staggered prices or wages under a taylor rule we analytically examine output persistence from monetary shocks in a dsge model with staggered prices or wages under a taylor rule surprisingly while taylor style staggering never yields persistence calvo style staggering of wages does generate persistence under decreasing returns to labour c 2009 elsevier b v all rights reserved

tax revenue and or trade liberalization abstract with the public finances of many developing and emerging market countries still heavily dependent on trade tax revenues further trade liberalization may be hindered unless they are able to develop alternative sources of revenue against a background of and to inform heightened theoretical controversy as to the appropriate balance between trade and other taxes not least the vat this paper uses panel data for 117 countries over 32 years cleaned for a variety of problems in standard data sources to address a central question of fact have countries recovered from domestic taxes the revenues they have lost from past episodes of trade liberalization for high income countries the answer is clearly yes for middle income countries there are robust signs of strong replacement both concurrently with the revenue loss and essentially dollar for dollar in the long run signs of significant recovery by low income countries are flimsier however and their experiences appear to have varied widely the picture that emerges for low income countries is thus that replacement has been and become higher than previous studies have suggested but sufficiently incomplete in many cases to give cause for concern

social learning and monetary policy rules we analyse the effects of social learning in a monetary policy context social learning might be viewed as more descriptive of actual learning behaviour in complex market economies in our model taylor principle governs uniqueness and expectational stability of rational expectations equilibrium ree under homogeneous recursive algorithms we find that the taylor principle is not necessary for convergence to ree minimum state variable msv equilibrium under social learning sunspot equilibria exist in the indeterminate region our agents cannot co ordinate on a sunspot equilibrium in general form specification however they can co ordinate on common factor specification we contribute to the use of genetic algorithm learning in stochastic environments

classifying monetary economics fields and methods from past to future we propose a simple yet sufficiently encompassing classification scheme of monetary economics it comprises three fundamental fields and six recent areas that expand within and across these fields the elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature neither is this an attempt to produce a relatively complete systematization our intention in taking stock is not finality or exhaustiveness we rather suggest a viewpoint and a possible ordering of the accumulating knowledge our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

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

revenue implications of trade liberalization under imperfect competition abstract this paper shows that only where the industry in question is a monopoly can we unequivocally assert that exclusive reliance by the government on the less distortionary profit tax is sufficient to make up any shortfall in tariff revenue and ensure higher welfare for both consumers and producers

regime shifts and the canada us exchange rate in a multivariate framework this study re evaluates the monetary approach for the canada u s exchange rate and shows that its basic structure can be verified although the coefficients are not consistently in line with theory our findings also indicate that exchange rate adjustment is subject to regime shifts

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

trade liberalization in oligopolistic industries the quota case abstract this paper analyzes the short and long run effects on domestic price and output of partially liberalizing quota restrictions in a general model of oligopolistic interactions it is shown that perverse outcomes are possible in a number of cases including that of rational conjectures a larger quota may result in an increase in domestic output in the short run and a higher price in the long run the relationship between oligopolistic conjectures and the number of firms in the industry is critical in determining the long run outcome

fiscal foundations of in ation imperfect knowledge this paper proposes a theory of the scal foundations of in ation based on imperfect knowledge and learning the theory is similar in spirit to but distinct from unpleasant monetarist arithmetic and the scal theory of the price level because the assumption of imperfect knowledge breaks ricardian equivalence details of scal policy such as the average scale and composition of the public debt matter for in ation as a result scal policy constrains the e cacy of monetary policy heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor in ation expectations the model predicts that the great moderation period would not have been so moderate had scal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies in the aftermath of the 2007 09 global recession