monetary policy and uncertainty in an empirical small open economy model this paper explores optimal policy design in an estimated model of three small open economies australia canada and new zealand within a class of generalized taylor rules we show that to stabilize a weighted objective of output consumer price in ation and nominal interest variation optimal policy does not respond to the nominal exchange this is despite the presence of local currency pricing and due in large part to observed exchange rate disconnect in these economies optimal policies that account for the uncertainty of model estimates as captured by the parameters posterior distrbution similarly exhibit a lack of exchange rate response in contrast to brainard 1967 the presence of parameter uncertainty can lead to more or less aggressive policy responses depending on the model at hand

euro dollar real exchange rate dynamics in an estimated two country model an assessment abstract several theoretical contributions using two country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics we estimate a two country model using data for the united states and the euro area and study the importance of such alternative assumptions in fitting the data a model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility and fits the dynamics of domestic variables well the complete markets assumption delivers a similar fit only when the structure of shocks is rich enough

reprint of price and quantity collars for stabilizing emission allowance prices laboratory experiments on the eu ets market stability reserve abstract we report on laboratory experiments with financially motivated participants comparing alternative proposals for managing the time path of emission allowance prices in the face of random firm specific and market level structural shocks market outcome measures such as social surplus and price variability are improved by the use of a price collar auction reserve price and soft price cap comparable performance enhancements are not observed with the implementation of a quantity collar that adjusts auction quantities in response to privately held inventories of unused allowances in some specifications the quantity collar performed worse than no stabilization policy at all the experiment implemented a specific set of structural elements and extrapolation to other settings should be done with caution nevertheless an examination of the observed behavioral patterns and deviations from optimal behavior suggests that a price collar has an important although perhaps not exclusive role to play in constructing an effective market stability policy

consumption housing collateral and the canadian business cycle using bayesian methods we estimate a small open economy model in which consumers face limits to credit determined by the value of their housing stock the purpose of this paper is to quantify the role of collateralized household debt in the canadian business cycle

environmental regulation technological diversity and the dynamics of technological change inducing technological progress is an important objective of environmental regulation we investigate under which conditions regulation induced technological progress pursues the best technological option we analyze a setting with vertical and horizontal technological progress cost uncertainty time limited patent protection and a case that is typical for some emissi4on intensive industries like electricity generation or the chemical industry under taxes and standards only the current least cost technology is used and developed implying a lock in into a possibly inferior technology tradable permits yield slower progress but can facilitate the simultaneous development of technologies rendering lock ins less likely

prices vs quantities the effects on technology choice abstract it is well known that price and quantity based regulation approaches provide different investment incentives but usually only the effect on the level of investment is studied in this paper we show that under uncertainty they also lead to the adoption of different technologies due to the disparate risks that a regulated firm is exposed to different regulatory instruments induce different technologies and this effect cannot be compensated by varying the design of the instruments furthermore price based instruments lead to the adoption of a socially suboptimal technology so that the inclusion of technology choice provides a bias in favor of a quantity based regulation compared with weitzman s weitzman m l 1974 prices vs quantities review of economic studies 41 477 491 criterion

policy options to improve the effectiveness of the eu emissions trading system a multi criteria analysis abstract this paper considers several policy options which have been proposed to improve the functioning of the ets these options require an intervention either on the ets cap 30 target set aside carbon central bank long term target or on the carbon price european and national price floor we analyse the impact of each policy on the ets carbon price and emissions a multi criteria evaluation method is applied to compare the policy options against a plurality of environmental economic and procedural criteria we find that the final ranking depends on the goals to be achieved i e the relative weights attributed to the criteria when policymakers want mainly to support the carbon price both in the short and long run while improving ets flexibility and harmonization the ccb and the eu price floor are respectively ranked as first and second best options as the preference for environmental and implementation goals gradually increases the position of the eu price floor and ccb options tend to invert the 30 target should be adopted when reducing emissions is the priority goal while a national price floor is the worst option in this case nevertheless self interested states looking for a relatively quick feasible solution may find it optimal

international spillovers of large scale asset purchases this paper evaluates the international spillover eects of large scale asset purchases lsaps using a two country dynamic stochastic general equilibrium model with nominal and real rigidities and portfolio balance eects portfolio balance eects arise from imperfect substitution between short and long term bond portfolios in each country as well as between domestic and foreign bonds within these portfolios we show that lsaps lower both domestic and foreign long term yields and stimulate economic activity in both countries international spillover eects

firm incentives to promote technological change in pollution control reply abstract the process of technological change in pollution control is broken into three basic steps innovation diffusion and optimal agency response firm incentives to promote these steps are then examined under five regulatory regimes direct controls emission subsidies emission taxes free marketable permits and auctioned marketable permits on a relative basis emission taxes and auctioned permits provide the highest firm incentives to promote technological change at times free permits generate lower incentives direct controls which are common regulatory tools usually provide the lowest relative firm incentives to promote technological change

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

forecasting the australian economy with dsge and bvar models reflecting the importance of commodities for the australian economy we construct a dynamic stochastic general equilibrium dsge model of the australian economy with a commodity sector we assess whether its forecasts can be improved by using it as a prior for an empirical bayesian vector autoregression bvar we find that the forecasts from the bvar tend to be more accurate than those from the dsge model nevertheless for output growth these forecasts do not outperform benchmark models such as a small open economy bvar estimated using the standard priors for forecasting a bayesian factor augmented vector autoregression produces the most accurate near term inflation forecasts

comparing new keynesian models of the business cycle a bayesian approach abstract the baseline new keynesian model cannot replicate the observed persistence in inflation output and real wages for sensible parameter values as a result several extensions have been suggested to improve its fit to the data we use a bayesian approach to estimate and compare the baseline sticky price model of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 and three extensions our empirical results are as follows first we find that adding price indexation improves the fit of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 model second models with both staggered price and wage setting dominate models with only price rigidities third introducing wage indexation does not significantly improve the fit fourth all model estimates suggest a high degree of price stickiness fifth the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts finally the estimated inflation parameters of the taylor rule are stable across models

openness imperfect exchange rate pass through and monetary policy abstract this paper analyses the implications of imperfect exchange rate pass through for optimal monetary policy in a linearised open economy dynamic general equilibrium model calibrated to euro area data imperfect exchange rate pass through is modelled by assuming sticky import price behaviour the degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output net trade and the exchange rate it is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation

identification versus misspecification in new keynesian monetary policy models abstract in this paper we study identification and misspecification problems in standard closed and open economy empirical new keynesian dsge models used in monetary policy analysis we find that problems with model misspecification still appear to be a first order issue in monetary dsge models and argue that it is problems with model misspecification that may benefit the most from moving from a classical to a bayesian framework we also argue that lack of identification should neither be ignored nor be assumed to affect all dsge models fortunately identification problems can be readily assessed on a case by case basis by applying recently developed pre tests of identification

eu climate policy up to 2020 an economic impact assessment in its fight against climate change the eu is committed to reducing its overall greenhouse gas emissions to at least 20 below 1990 levels by 2020 to meet this commitment the eu builds on segmented market regulation with an eu wide cap and trade system for emissions from energy intensive installations ets sectors and additional measures by each eu member state covering emission sources outside the cap and trade system the non ets sector furthermore the eu has launched additional policy measures such as renewable energy subsidies in order to promote compliance with the climate policy target basic economic reasoning suggests that emission market segmentation and overlapping regulation can create substantial excess costs if we focus only on the climate policy target in this paper we evaluate the economic impacts of eu climate policy based on numerical simulations with a computable general equilibrium model of international trade and energy use our results highlight the importance of initial market distortions and imperfections as well as alternative baseline projections for the appropriate assessment of eu compliance cost

environmental policy incentives to adopt advanced abatement technology abstract we investigate incentives through environmental policy instruments to adopt advanced abatement technology first we study the case where the regulator makes long term commitments to policy levels and does not anticipate arrival of new technology we show that taxes provide stronger incentives than permits auctioned and free permits offer identical incentives and standards may give stronger incentives than permits second we investigate scenarios where the regulator anticipates new technologies we show that with taxes and permits the regulator can induce first best outcomes if he moves after firms have invested whereas this does not always hold if he moves first

price stability with imperfect financial integration this paper studies whether the international monetary system can be affected by asymmetries in the cross country positions in the international financial markets i e the fact that some countries are large debtors while others are creditors an important channel that is explored is the interaction between international risk sharing and the stabilization role of monetary policy in each country the main finding is that the welfare costs of incomplete markets and the gains of deviating from a policy of price stability are increasing with the cross country asymmetries in the initial net international positions and in particular they become nonnegligible when the persistence of the shocks increases 1 of a permanent shift in steady state consumption for the welfare costs of incomplete markets and 0 2 for the gains of deviating from a policy of price stability when global imbalances become larger optimal monetary policy requires an increase in the volatilities of the real returns on assets and in particular of the nominal interest rates which should happen to be more correlated across countries

u s monetary regimes and optimal monetary policy in the euro area monetary policy in the united states has been documented to have switched from reacting weakly to inflation fluctuations during the 1970s to fighting inflation aggressively from the early 1980s onward in this paper i analyze the impact of the u s monetary policy regime switches on the eurozone i construct a new keynesian two country model where foreign u s monetary policy switches regimes over time i estimate the model for the u s and the euro area using quarterly data and find that the united states has switched between those two regimes in line with existing evidence i show that foreign regime switches affect home eurozone inflation and output volatility and their responses to shocks substantially as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables such as imported goods relative prices in fact i show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally interestingly i show that only marginal gains arise for the euro area when the european central bank ecb adjusts its policy according to the monetary regime in the united states thus a simple time invariant monetary policy rule with a strong reaction to producer price index ppi inflation and relative prices is enough to counteract the effects of monetary policy switches in the united states

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

procrastinating reform the impact of the market stability reserve on the eu ets abstract we study the impact of the market stability reserve msr on price and emission paths of the eu ets from 2019 onwards the msr will adjust the number of allowances auctioned as a function of the size of the surplus i e in times of a large surplus it shifts the issue date of allowances into the future in a perfectly competitive allowance market the msr only affects price and emission paths if the baseline equilibrium becomes unfeasible if the msr is binding prices increase in the short run but drop in the medium run relative to the baseline the msr increases price variability if uncertainty over future allowance demand is resolved while there is a surplus the long run cap is unaffected by both the msr and overlapping climate policies this contrasts the eu s objectives of improving the resilience of the eu ets and increasing synergies with overlapping climate policies

mundell s trilemma policy trade offs within the middle ground abstract mundells s trilemma makes strong categorial predictions on monetary policy trade offs where a small economy either has to adopt floating exchange rates or a closed capital account to establish interest rate autonomy however the trilemma is silent about a functional description of respective trade offs for intermediate middle ground policies accounting for the entire space of such policies we study monetary autonomy in an unrestricted and continuous manner for 20 mostly developed economies evidence suggests that interest rate dependence almost linearly increases with the fx stability indicator under financial openness thereby full independence would require an intensity of fx volatility which policymakers might hardly accept however this strong trade off can be relaxed efficiently by a moderate reduction of financial openness hence such a policy might offer some protection against the global financial cycle and leaves a considerable scope to combine a domestic monetary policy with a reduced fx rate variability

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

is inflation sticky abstract new keynesian sticky price models predict that monetary policy can affect real variables however they also predict that inflation can be reduced without depressing output or employment in fact bringing down inflation is costly presenting a challenge to the new keynesian model two departures from the new keynesian model predict costly disinflation one assumes sticky inflation rather than sticky prices while the other assumes less than perfectly rational expectations taking into account information from surveys of inflation expectations i find the evidence suggests that inflation is not sticky and that inflation expectations are less than perfectly rational

business cycles and monetary regimes in emerging economies a role for a monopolistic banking sector abstract this study shows that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle strategic limit pricing aimed at protecting retail niches from potential competitors generates countercyclical bank markups markup increments during recessions directly increase borrowing costs for firms and indirectly damage the financial position of firms balance sheets increasing the risk perception of lenders i use bayesian techniques and data from argentina to show that the inclusion of monopolistic banking improves the fit of the new keynesian small open economy model

does more stringent environmental regulation induce or reduce technology adoption when the rate of technology adoption is inverted u shaped abstract we show that for a broad class of technologies the relationship between policy stringency and the rate of technology adoption is inverted u shaped this happens when the marginal abatement cost mac curves of conventional and new technologies intersect which invariably occurs when emissions are proportional to output and technological progress reduces emissions per output this outcome does not result from policy failure on the contrary in social optimum the relationship between the slope of the marginal damage curve and the rate of technology adoption is also inverted u shaped under more general conditions these curves can look even more complicated e g such as inverted w shaped

global banks financial shocks and international business cycles evidence from an estimated model this paper estimates a two country model with a global bank using us and euro area ea data and bayesian methods the estimated model matches key us and ea business cycle statistics empirically a model version with a bank capital requirement outperforms a structure without such a constraint a loan loss originating in one country triggers a global output reduction banking shocks matter more for ea macro variables than for us real activity during the great recession 2007 09 banking shocks accounted for about 20 of the fall in us and ea gdp and for more than half of the fall in ea investment and employment

the economics of pollution permit banking in the context of title iv of the 1990 clean air act amendments abstract this paper presents a model of the collective emission permit banking behavior of electricity generating units affected by title iv of the clean air act amendments of 1990 a rigorous treatment of the constraint that pollution permits cannot be borrowed from future allocations is introduced this approach enables an analysis of the impact of future changes in electricity demand regulations and technologies on the present permit price and emissions level the effect of uncertainty on the banking behavior is also explored

politics matters regulatory events as catalysts for price formation under cap and trade this paper investigates how the political process of making cap adjustments has shaped market outcomes in the world s largest cap and trade system the eu ets capitalizing on an event study method that incorporates an econometric technique designed to handle parameter instability and model uncertainty we assess the news implied price response to 29 hand collected announcements about the eu ets supply schedule our findings document a high market responsiveness to political events and reveal how market participants view the evolution of cap stringency in the light of a particular announcement we provide evidence that a sequence of strong event induced price drops evolve in the backloading decision process which is consistent with the interpretation that market participant s confidence in the political support for reform and probably the eu ets in general has been unsettled we also document positive price reactions to the 2020 and 2030 policy packages but not the 2050 roadmaps

immigration remittances and business cycles we use data on border enforcement and macroeconomic indicators from the united states and mexico to estimate a two country business cycle model of labor migration and remittances the model matches the cyclical dynamics of labor migration to the united states and documents how remittances to mexico serve an insurance role to smooth consumption across the border during expansions in the destination economy immigration increases with the expected stream of future wage gains but it is dampened by a sunk migration cost that reflects the intensity of border enforcement during recessions established migrants are deterred from returning to their country of origin which places an additional downward pressure on the wage of native unskilled workers thus migration barriers reduce the ability of the stock of immigrant labor to adjust during the cycle enhancing the volatility of unskilled wages and remittances we quantify the welfare implications of various immigration policies for the destination economy

what lies beneath a time varying favar model for the uk transmission mechanism we use a time varying factor augmented var to investigate changes in the transmission mechanism of economic shocks in the uk our estimates demonstrate the importance of time variation and suggest that monetary policy shocks had a bigger impact on inflation equity prices and the exchange rate during the inflation targeting period changes in the transmission of policy shocks to bond yields point to more efficient management of long run inflation expectations finally we investigate responses of disaggregated prices with the median becoming more negative and cross sectional patterns consistent with a decrease in the role of cost channels

commodity price volatility with endogenous natural resources abstract natural resource reserves are exogenous in models of small commodity exporters changes in the stock of reserves play no role in the macroeconomy including in business cycle volatility trade dynamics or exchange rate volatility we consider richer supply dynamics and model exploration and depletion we show that an endogenous supply of reserves is important for capturing the stylised facts associated with commodity price shocks including a commodity currency the crowding out of non commodity activity dutch disease and a volatile business cycle we also consider how exploration and depletion affect the ranking of optimal monetary and taxation policies when natural resource reserves are held fixed monetary policy is an efficient tool for stabilising the effects of commodity price shocks however when exploration and depletion are accounted for using interest rates to stabilise the effects of commodity price changes becomes inefficient using taxes on the resource sector specifically an ad valorem royalty remains efficient

a model of intertemporal emission trading banking and borrowing abstract this paper provides a general treatment of emission trading banking and borrowing in an intertemporal continuous time model using optimal control theory the decentralized behavior of firms is shown to lead to the least cost solution attainable under joint cost minimization explicit solutions for the time paths of emissions and permit prices are derived when firms are allowed to both bank and borrow and when firms are only allowed to bank emission permits the policy implications of emission banking and borrowing are discussed

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

causes of the eu ets price drop recession cdm renewable policies or a bit of everything new evidence the price of eu allowances euas in the eu emissions trading scheme eu ets fell from almost 30 tco2 in mid 2008 to less than 5 tco2 in mid 2013 the sharp and persistent price decline has sparked intense debates both in academia and among policy makers about the decisive allowance price drivers in this paper we examine whether and to what extent the eua price drop can be justified by three commonly identified explanatory factors the economic recession renewable policies and the use of international credits capitalizing on marginal abatement cost theory and a broadly extended data set we find that only variations in economic activity and the growth of wind and solar electricity production are robustly explaining eua price dynamics contrary to simulation based analyses our results point to moderate interaction effects between the overlapping eu ets and renewable policies the bottom line however is that 90 of the variations of eua price changes remains unexplained by the abatement related fundamentals together our findings do not support the widely held view that negative demand shocks are the main cause of the weak carbon price signal in view of the new evidence we evaluate the eu ets reform options which are currently discussed

inflation expectations and macroeconomic dynamics the case of rational versus extrapolative expectations the motivation of this paper is to understand the effects of coupling a macroeconomic model of inflation rate dynamics relying on an aggregate expectation to a heterogeneous expectations framework a standard macroeconomic textbook model consisting of okun s law an expectations augmented phillips curve and an aggregate demand relation is extended to allow agents the possibility of selecting between different types of forecasting strategies to predict the future inflation rate rules that have produced low prediction errors in the recent past are favored by agents here we consider trend following and rational expectations using a mixture of analytical and numerical tools we investigate the model s dynamics and discuss the conditions under which the extended model leads to endogenous fluctuations in macroeconomic variables some preliminary results are offered for the case in which a taylor like monetary policy rule is included in the model jel classification c61 c62 e31 e32

sticky price models and the natural rate hypothesis abstract a major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state in this paper we estimate a dynamic optimizing business cycle model whose price setting behavior satisfies the natural rate hypothesis the price adjustment specifications we consider are the sticky information specification of mankiw and reis sticky information versus sticky prices a proposal to replace the new keynesian phillips curve quarterly journal of economics 117 1295 1328 and the indexed contracts of christiano et al nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 45 our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen consequently the alternative model specifications deliver similar estimates of the u s output gap series but the empirical behavior of the gap series differs substantially from standard gap estimates

exchange rate economics is always and everywhere controversial abstractthis article reviews the major developments in the recent literature on exchange rate economics it is argued that the link between the exchange rate and economic fundamentals is breaking new ground evidence indicates that alternative analytical frameworks such as the new open economy macroeconomics and exchange rate arrangements such as the euro have their theoretical and analytical elegance but are proving empirically very difficult to implement the role of methodological advances and alternative fundamental instruments such as world commodity prices is also highlighted

overvalued swedish monetary policy in the 1930s the article discusses sweden s monetary policy in the 1930s which has been hailed as the first and only example of successful price level targeting our contribution is twofold first we argue that the crucial measure that immediately ended deflationary expectations and enabled a swift recovery was a strong and involuntary devaluation of the currency not the adoption of a new monetary policy framework second starting from the recent literature on monetary policy at the zero lower bound we conclude that sweden s exchange rate policy is more relevant for the current discussion than its tentative experience with price level targeting

be careful what you calibrate for social discounting in general equilibrium abstract concerns about intergenerational equity have led to an influential practice of setting social utility discount rates based on ethical considerations rather than to match household behavior particularly in climate change economics e g stern 2006 this paper formalizes the broader policy implications of this approach in general equilibrium by characterizing jointly optimal environmental and fiscal policies in a climate economy model with differential planner household discounting first i show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy if the government discounts the future less than households implementing the optimal allocation requires an effective capital income subsidy a negative intertemporal wedge and in a setting with distortionary taxation an effective labor consumption tax wedge that is decreasing over time second if the government cannot subsidize capital income the constrained optimal carbon tax may be up to 50 below the present value of marginal damages the social cost of carbon due to the general equilibrium effects of climate policy on household savings third given the choice to optimize either carbon capital or labor income taxes the socially discounting planner s welfare ranking is ambiguous over a standard range of parameters overall in general equilibrium a policy maker s choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy

uncovering the hit list for small inflation targeters a bayesian structural analysis we estimate underlying structural macroeconomic policy objectives of three of the earliest explicit inflation targeters within the context of a small open economy dynamic stochastic general equilibrium model we assume central banks set policy optimally such that we can reverse engineer policy objectives from observed time series data joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective none of the central banks show a concern for stabilizing the real exchange rate all three central banks share a concern for minimizing the volatility in the change in the nominal interest rate we also show that the resulting optimal policy rule responds to exchange rate movements even in the case where the central banks do not explicitly care about exchange rate stabilization this result is also corroborated by results from an alternative simple rule characterization and estimation of central bank behavior these last two findings point to the pitfalls of making inferences from the level of ad hoc simple rules about what central banks may care about

a prudential stable funding requirement and monetary policy in a small open economy abstract the basel iii net stable funding requirement introduced in january 2018 requires banks to use a minimum share of long term wholesale funding and deposits to fund their assets a similar regulation has been in place in new zealand since 2010 we introduce the stable funding requirement sfr into an open economy dsge model featuring a banking sector with richly specified liabilities and estimate the model for new zealand we then evaluate the impact of the new prudential instrument on monetary policy trade offs a higher steady state sfr level amplifies the effects of shocks to the spread on long term bond financing in the banking sector adding to macroeconomic volatility conditional on these shocks however the sfr plays a passive role in the transmission of all other shocks to the real economy hence in the overall picture the monetary policy trade off between inflation stabilisation and output stabilisation is only slightly worsened by the sfr we note that the trade off can be improved when monetary policy responds systematically to credit growth

do renewable energy policies reduce carbon emissions on caps and inter industry leakage abstract in a parsimonious two sector general equilibrium model we challenge the widely held tenet that within a cap and trade system renewable energy policies have no effect on carbon emissions if the cap does not capture all sectors we demonstrate that variations of a renewable energy subsidy change aggregate carbon emissions through an inter industry leakage effect we decompose this effect into intuitively intelligible components that depend in natural ways on measurable elasticity parameters raising the subsidy always reduces emissions if funded by a lump sum tax reinforcing recent findings that tightening environmental regulation can cause negative leakage however if the subsidy is funded by a levy on electricity it can increase emissions these results provide a valuable basis for an informed design of renewable energy policies and an accurate assessment of their effectiveness we highlight how a state of the art statistic used by governments to gauge such effectiveness virtual emission reductions is biased because inter industrial leakage effects are not captured

rushing the impatient allowance reserves and the time profile of low carbon investments postponing the issue date of allowances in a cap and trade scheme by e g a reserve mechanism impacts the time profile of low carbon investments if the postponement constrains intertemporal arbitrage short term investments increase but long term investments are deterred this effect aggravates the shortage of long term investments at least partially attributed to firms impatience the cancellation of allowances agreed for phase iv of the eu ets is suitable to counteract the negative effects of cap neutral postponement on long term investments by making the reserve redundant all effects crucially depend on how firms form expectations about future allowance prices

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

inflation dynamics marginal cost and the output gap evidence from three countries recent studies have argued that the new keynesian phillips curve calvo pricing model is empirically valid provided that real marginal cost rather than detrended output is used as the variable driving inflation one interpretation of this result is that real marginal cost is not closely related to the output gap and so models for monetary policy need to include labormarket rigidities an alternative interpretation is that marginal cost and the output gap are closely related but that the latter needs to be measured in a manner consistent with dynamic general equilibrium models to date there has been little econometric investigation of this alternative interpretation this paper provides estimates of the new keynesian phillips curve for the u s the u k and australia using theory consistent estimates of the output gap using this theory to measure the output gap leads to a considerable improvement in the empirical performance of output gapbased phillips curves

german wage moderation and european imbalances feeding the global var with theory german labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the euro area we investigate this hypothesis quantitatively we develop a 3 region open economy new keynesian model with search and matching frictions from which we derive robust sign restrictions for wage bargaining and matching efficiency shocks which we term wage moderation shocks we impose these restrictions on a global var consisting of germany and 8 emu countries to identify a wage moderation shock in germany our results show that although the german current account was significantly affected by wage moderation shocks their contribution to european current account imbalances was negligible we conclude that the german labor market reforms cannot be the lone driver of european imbalances

aggregate deposit insurance funding and taxpayer bailouts abstract recent events have focused attention on the fragility of the federal deposit insurance funds and made redesign of the insurance system an active policy issue this paper explores the implications of different rate structures for the long term solvency of the fund using two simulation techniques based on historical loss distributions three findings stand out 1 under the former 8 33 bp premium rate as well as under the 15 bp premium rate mandated as the new long run target or default premium rate by both firrea and the fdic assesment rate act of 1990 the probability that the fund could become insolvent over a given 55 year period is higher than previously recognized 2 raising the effective cap on the fund to as low as 2 5 of deposits can substantially reduce the probability of insolvency without further increasing the premium rate and 3 the anticipated temporary 1991 premium rate of 19 5 bp implies a quite low probability of insolvency

monetary policy in a low pass through environment in a dynamic new keynesian optimizing model we introduce incomplete exchange rate pass through on import prices three results stand out first unlike canonical models with perfect pass through which emphasize a type of isomorphism incomplete pass through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy second productivity driven deviations from the law of one price assume the interpretation of endogenous cost push shocks third the optimal commitment policy relative to discretion entails a smoothing of the deviations from the law of one price and requires more stable nominal and real exchange rates

spite and development in a wide variety of settings spiteful preferences would constitute an obstacle to cooperation trade and thus economic development this paper shows that spiteful preferences the desire to reduce another s material payoff for the mere purpose of increasing one s relative payoff are surprisingly widespread in experiments conducted in one of the least developed regions in india uttar pradesh in a one shot trust game the authors find that a large majority of subjects punish cooperative behavior although such punishment clearly increases inequality and decreases the payoffs of both subjects in experiments to study coordination and to measure social preferences the findings reveal empirical patterns suggesting that the willingness to reduce another s material payoff either for the sake of achieving more equality or for the sake of being ahead is stronger among individuals belonging to high castes than among those belonging to low castes because extreme social hierarchies are typically accompanied by a culture that stresses status seeking it is plausible that the observed social preference patterns are at least partly shaped by this culture thus an exciting question for future research is the extent to which different institutions and cultures produce preferences that are conducive or detrimental to economic development

what ails the european union s emissions trading system abstract the european union has adopted economists idea of curbing carbon emissions by establishing markets where bankable emissions allowances can be traded implicit in proofs that cap and trade minimizes the expected discounted cost of capping emissions however is that the regulator not intervene once the market is established otherwise market participants encounter uncertainties beyond what a social planner faces this paper discusses the equilibrium that results when private agents bank tradable allowances in the face of ongoing risk of future regulatory intervention and shows that the cap will be achieved at unnecessarily high cost even if no regulatory intervention actually occurs evidence that such risks are currently distorting eu ets comes from the depressed current spot price from the findings of schopp and neuhoff 2014 that speculators require multiples of the riskless rate of interest to bank permits and from the sensitivity of prices to votes and announcements about proposed future regulatory changes

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

some unpleasant general equilibrium implications of executive incentive compensation contracts abstract we consider a simple real business cycle model in which shareholders hire self interested executives to manage their firm a generic family of compensation contracts similar to those employed in practice is studied when compensation is convex in the firm s dividend an increase in the firm s output results in a more than proportional increase in the managers income incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium one in which business cycles are driven by self fulfilling fluctuations in managers expectations the proposed family of contracts may yield first best outcomes for specific parameter choices

dilemma of the silver standard economies the case of china exchange rate commitments implied in the silver standard originally anchored china s monetary policy and the inflation rate in the early republican period it was believed that china s free silver standard acted as a natural check on the excessive issuing of notes by warlords and local governments this consensus view however overlooks the fact that the silver standard was inherently unstable because it left no room for monetary policy to stabilize output and inflation this article employs a formal structural model to show that a fiat currency unlinked to fluctuations in the price of silver that allows government to implement self adjusting monetary policies would further stabilize china s output and inflation

robust control informational frictions and international consumption correlations abstract in this paper we examine the effects of model misspecification robustness or rb on international consumption correlations in an otherwise standard small open economy model with endogenous capital accumulation we show that in the presence of capital mobility in financial markets rb lowers the international consumption correlations by generating heterogeneous responses of consumption to productivity shocks across countries facing different macroeconomic uncertainty in addition we show that rb can also improve the model s predictions in three other moments of consumption dynamics the relative volatility of consumption to income the persistence of consumption and the correlation between consumption and output after calibrating the rb parameter using the detection error probabilities we show that the model can explain the observed international consumption correlations as well as the other consumption moments quantitatively finally we show that the main conclusions of our benchmark model do not change in an extension in which the agent cannot observe the state perfectly due to finite information processing capacity

putting the new open economy macroeconomics to a test abstract this paper explores one way to extend the new open economy macroeconomics in an empirical direction adapting maximum likelihood procedures it estimates and tests an intertemporal small open economy model with monetary shocks and nominal rigidities results offer mixed support for a benchmark model where prices are assumed to be sticky in the currency of the buyer price stickiness seems to be an important element as overall results are poorer for versions of the model in which prices either are flexible or are sticky in the currency of the producer the benchmark model does a better job explaining some variables than others in particular it does a poor job explaining exchange rate movements