output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

nominal income targeting in an open economy optimizing model abstract this paper presents simulation results regarding the performance of nominal income targeting a monetary policy rule that sets interest rates in response to deviations of nominal gdp growth from a target path the macroeconomic model is one in which agents solve dynamic optimization problems with rational expectations but in an environment with slow price adjustments in the present version consumption choices reflect habit formation and the economy is open to international flows of goods and securities when calibrated to quarterly us data the model s results suggest that nominal income targeting performs well in relation to inflation targeting and taylor rules

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

dynamic inconsistencies counterfactual implications of a class of rational expectations models a number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations while the theoretical motivation behind these models is sound the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data for both inflation and real side variables exhibit gradual and hump shaped responses to real and monetary shocks for models that are intended for monetary policy analysis these dynamic shortcomings should be considered quite serious when monetary policy has only short run effects on real variables the inability to approximately capture the short run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis this paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem the paper also discusses several potential solutions to the problem including alterations to the expectations assumption to the order of differencing implicit in the model and to the underlying behavioral assumptions this abstract was borrowed from another version of this item

interest rate volatility and monetary policy in october 1979 the federal reserve shifted from an interest rate oriented operating procedure to a reserves oriented procedure it is argued in this paper that part of the very large increase in interest rate volatility which resulted from the policy switch may have been due to shifts in the parameters of the money demand equation shifts due to the adoption of a reserve aggregates operating procedure this result is derived by comparing rational expectations equilibria in a simple theoretical model under alternative policy rules this allows the variance of interest rates to be explicitly expressed as a function of the policy rule this abstract was borrowed from another version of this item

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

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

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

inflation targeting some extensions previous analyses of the implementation of inflation targeting are extended to monetary policy responses to different shocks consequences of model uncertainty and effects of interest rate smoothing and stabilization model uncertainty output stabilization and interest rate stabilization or smoothing all call for a more gradual adjustment of the conditional inflation forecast toward the inflation target the conditional inflation forecast is the natural intermediate target during inflation targeting the optimal way of reacting to shocks is hence to check how they affect the inflation forecast and then take the appropriate action jel classification e42 e52 e58

testing for the lucas critique a quantitative investigation this thesis contains four essays which studies the macroeconomic effects of fiscal and monetary policy quantitatively the first essay investigates whether swedish postwar business cycles have been generated by domestic or foreign shocks and finds that they are about equally important in the second essay the effects of government budget deficits on interest rates in sweden are studied in a small open economy framework the empirical results which have high power due to very large swings in deficits and interest rates provide support that larger deficits produce higher interest rates and thus give support against the ricardian view the third essay seeks to identify optimal social insurance and redistribution levels in sweden and the u s with respect to temporary and permanent idiosyncratic productivity risks the results indicate that sweden should reduce the social security level while the u s should approximately maintain the current level in the last essay the small sample properties of a well known statistical test for the lucas critique the super exogeneity test is studied in a general equilibrium environment the results indicate that the super exogeneity test do not have sufficient power in small samples

monetary policy and the stability of macroeconomic relationships summary estimates of the effect of different international monetary regimes on the parameters of the phillips curve the keynesian consumption function and other reduced form macroeconomic relationships are given the estimates provide a quantitative assessment of the importance of the lucas critique for such regime shifts the estimates are calculated by stochastically simulating an estimated multicountry economic model with rational expectations under a fixed exchange rate regime and a flexible exchange rate regime in both regimes interest rates are the primary instrument of monetary policy noticeable shifts occur in most of the macroeconomic relationships especially in the consumption function and the phillips curve and these shifts have simple economic interpretations based on the changes in the variance and the serial correlation of income and prices in the two regimes however in most cases the shifts are not large quantitatively at least as implemented here this type of regime shift does not seem to generate much instability in the conventional macroeconomic relationships several possible reasons for this finding are discussed in the paper in this paper i plan to follow in a tradition pioneered by a w phillips almost 40 years ago phillips 1954 evaluated monetary and fiscal policy by examining the operating properties of simple policy rules in a fully specified economic model he did this by applying control theory ideas from the engineering literature by examining the performance of the model economy under different types of policy rules for example proportional derivative and integral rules he attempted to determine which policy rule would work well and which would not work well in practice following in the phillips tradition does not mean that i will use the same theoretical models econometric methods or computational techniques that phillips used to do so would in my view pass by fundamental developments in dynamic economic theory econometrics and solution procedures that have been achieved since the time that phillips wrote phillip s 1954 analysis was based on keynesian islm multiplier accelerator models that were popular in the early 1950s the policy evaluation i describe in this lecture differs from phillips s policy evaluation in several ways first it makes use of a dynamic rational expectations model with forward looking behaviour in consumption investment wage setting and interest rates second the model is international and exchange rate determination reflects the current high degree of international capital mobility which did not exist when phillips wrote third the model is empirically estimated most of phillips s work was based on simulation models with calibrated parameters fourth the simulations are done stochastically with an empirically

spectral welfare cost functions if preferences are not time separable economic agents care not only about the magnitude of fluctuations in consumption but also about the persistence and other temporal characteristics of those fluctuations this paper extends and develops the theory of spectral utility functions which measure utility frequency by frequency to illustrate the interaction between consumption volatility and time non separable preferences to highlight the economic implications of the interaction spectral welfare cost functions are developed to provide a quantitative measure of the importance to economic agents of the temporal delivery of consumption volatility

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

forward looking behavior and optimal discretionary monetary policy abstract this paper derives a closed form solution for the optimal discretionary monetary policy in a model that allows for varying degrees of forward looking behavior we show that forward looking behavior can either attenuate or magnify the optimal policy response to inflation and the output gap depending on which part of the model economy is affected by expectations

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

on the exposure of the bric countries to global economic shocks the financial crisis led to a deep recession in many industrial countries while large emerging countries recovered relatively quickly from the financial crisis their performance deteriorated in the last years despite the modest recovery in advanced economies the higher divergence of business cycles is closely linked to the chinese transformation during the crisis the chinese fiscal stimulus prevented a decline in gdp growth not only in that country but also in resource rich economies the chinese shift to consumption driven growth led to a decline in commodity demand and the environment became more challenging for many emerging markets this view is supported by bayesian vars specified for the bric brazil russia india and china countries the results reveal a strong impact of international variables on gdp growth in contrast to the other countries china plays a crucial role in determining global trade and oil prices hence the change in the chinese growth strategy puts additional reform pressure on countries with abundant natural resources

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

is the fed too timid monetary policy in an uncertain world estimates of the taylor rule using historical data from the past decade or two suggest that monetary policy in the u s can be characterized as having reacted in a moderate fashion to output and in

t period economies with incomplete markets abstract a very simple proof is given for the existence of stochastic equilibria in a t period economy with an incomplete financial structure

do measures of monetary policy in a var make sense no in many vector autoregressions vars monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the u s federal reserve s reaction function furthermore the residuals from these regressions show little correlation across various vars or with funds rate shocks that are derived from forward looking financial markets my results provide a sharp critique of current monetary vars

recent changes in macro policy and its effects some time series evidence has the macroeconomic policy regime changed in the united states in the last few years if so has this change had an effect on macroeconomic relationships and in particular on the relationship between inflation and unemployment these two questions have been on the minds of most macroeconomists since the october 1979 switch from interest rates to reserves as an intermediate target for the federal reserve and the explicit endorsement of monetarism by the reagan administration in early 1981 the questions are important not only for predicting the course of the economy in the future but also for assessing the practical significance of the lucas critique according to this critique a change in policy regime should cause changes in the way the economy operates comparing economic relations before and after a change in regime should provide a test of the critique the approach in many recent studies has been to assume that the answer to the first question is yes that there has been a significant change in the macroeconomic policy regime and to look for changes in the phillips curve as a test of the lucas critique thus far the results have been mixed otto eckstein 1983 steven englander and cornelis los 1983 and george perry 1983 conclude that there has been no significant change in the phillips curve relationship phillip cagan and william fellner 1983 and wayne vroman 1983 find some evidence of a change wage inflation has come down more quickly especially in 1982 and early 1983 than would be predicted from a phillips curve however the assumption that there has been a regime change has received little empirical attention the october 1979 switch from interest rate targetting to reserve targetting at the fed is usually taken as prima facie evidence of a significant change in policy regime but such changes in operating procedures per se do not necessarily entail a change in policy regime relevant for macroeconomic purposes if they did then the renewed emphasis on interest rates rather than reserves starting in late 1982 should be cited as evidence of a return to the old regime a view which few researchers have taken in fact studies have shown that either interest rates or reserves can be used as intermediate targets for controlling the money supply and ultimately aggregate demand the choice between the two depends on whether shocks to the money markets are from the demand side or the supply side the issue of importance for assessing whether a regime change has taken place is how much the fed reacts by adjusting the money supply appropriately defined in response to conditions in the economy the procedure it uses to bring about this response is irrelevant 2 implicit in a macroeconomic policy regime is a rule relating the money supply to economic con 404 woodrow wilson school princeton university princeton nj 08544 this research was supported by a grant from the national science foundation at the national bureau of economic research and conducted in part at the federal reserve bank of philadelphia i am grateful to steve fries for research assistance and to steven englander and comelis los for comments on an earlier draft see robert lucas 1976 william fellner s 1978 credibility hypothesis is similar to the lucas critique in this context and has been tested in similar ways 2some have argued that for political reasons by focusing on reserves the fed would be able to let interest rates go higher than under interest rate targetting with reserve targetting fed officials could shift the blame for high interest rates elsewhere

assessing the lucas critique in monetary policy models empirical estimates of monetary policy rules suggest that the behavior of u s monetary policymakers changed during the past few decades however for that same time period statistical analyses of lagged representations of the economy such as vars often have not rejected the null of structural stability these two sets of empirical results appear to contradict the lucas critique this paper reconciles these results with the lucas critique by showing that the apparent policy invariance of reduced forms is consistent with the magnitude of historical policy shifts and the relative insensitivity of the reduced forms of plausible forward looking macroeconomic specifications to policy shifts