debt regimes and the effectiveness of monetary policy abstract this paper develops a medium scale non linear model of the us economy our proposed model a threshold vector autoregression with stochastic volatility assumes that changes in government debt to gdp ratios drive the transition between regimes capturing low and high debt regimes the introduction of hierarchical priors enables us to flexibly shrink the empirical model towards the moments implied by a dynamic stochastic general equilibrium model in the empirical application we analyze regime specific monetary policy shocks our findings indicate that the effect of monetary policy is less pronounced in high debt regimes pointing towards differences in the underlying monetary policy transmission mechanisms forecast error variance decompositions enable us to shed further light on the relative importance of monetary policy shocks within different debt regimes in terms of explaining the variance of forecast errors

the tragedy of the commons and economic growth why does capital flow from poor to rich countries we analyze a differential game in which all interest groups have access to a common capital stock we show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons we use this model to analyze capital flight in many poor countries property rights are not well defined since safe bank accounts in rich countries the inferior technology are available to citizens of these countries they engage in capital flight we show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare

the dynamics of sovereign debt crises and bailouts abstract motivated by the recent european debt crisis this paper investigates the scope for a bailout guarantee in a sovereign debt crisis defaults may arise from negative income shocks government impatience or a sunspot coordinated buyers strike we introduce a bailout agency and characterize the strategy with the minimal actuarially fair intervention which guarantees the no buyers strike fundamental equilibrium relying on the market for residual financing the intervention makes it cheaper for governments to borrow inducing them borrow more leaving default probabilities possibly rather unchanged the maximal backstop will be pulled precisely when fundamentals worsen

determinacy and identification with taylor rules the new keynesian taylor rule theory of inflation determination relies on explosive dynamics by raising interest rates in response to inflation the fed induces ever larger inflation unless inflation jumps to one particular value on each date however economics does not rule out explosive inflation so inflation remains indeterminate attempts to fix this problem assume that the government will choose to blow up the economy if alternative equilibria emerge by following policies we usually consider impossible the taylor rule is not identified without unrealistic assumptions thus taylor rule regressions do not show that the fed moved from passive to active policy in 1980

lack of confidence the zero lower bound and the virtue of fiscal rules abstract in the presence of the zero lower bound standard business cycle models with a taylor type monetary policy rule are prone to equilibrium multiplicity a drop in private sector confidence can drive the economy into a liquidity trap without any change in fundamentals i show in the context of a standard new keynesian model that it is possible to design ricardian fiscal spending rules that insulate the economy from such expectations driven liquidity traps in the case of price adjustment costs desirable fiscal rules ensure that a drop in confidence does not lead to a decline in real marginal costs in the case of nominal wage adjustment costs desirable fiscal spending rules ensure that a drop in confidence does not lead to a decline in the ratio of the marginal rate of substitution between private consumption and hours worked relative to the real wage rate

the dire effects of the lack of monetary and fiscal coordination abstract if the government s willingness to stabilize debt is waning while the central bank is adamant about keeping inflation low the economy enters a vicious spiral of higher inflation monetary tightening recession and further debt accumulation the mere possibility of this conflict represents a drag on the economy a commitment to inflate away the debt accumulated during a large recession leads to welfare improvements and lower uncertainty by separating long run fiscal sustainability from the short run fiscal stimulus this strategy can be used to avoid the zero lower bound as a technical contribution we explain how to build shock specific policy rules

a probability based stress test of federal reserve assets and income to support the economy the federal reserve amassed a large portfolio of long term bonds we assess the fed s associated interest rate risk including potential losses to its treasury securities holdings and declines in remittances to the treasury unlike past examinations of this interest rate risk we attach probabilities to alternative interest rate scenarios these probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields the resulting probability based stress test finds that the fed s losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation

financial innovation and the transactions demand for cash we document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives we extend the baumol tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost this modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology such as the increasing diffusion of bank branches and atm terminals we characterize the solution of the model which qualitatively reproduces several empirical patterns we estimate the structural parameters using micro data and show that quantitatively the model captures important economic patterns the estimates are used to quantify the expenditure and interest rate elasticity of money demand the impact of financial innovation on money demand the welfare cost of inflation and the benefit of atm ownership

when does a central bank s balance sheet require fiscal support abstract using a simple general equilibrium model we argue that it would be appropriate for a central bank with a large balance sheet composed of long duration nominal assets to have access to and be willing to ask for support for its balance sheet by the fiscal authority otherwise its ability to control inflation may be at risk this need for balance sheet support a within government transaction is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank s balance sheet is merged with that of the rest of the government

forward guidance communication commitment or both abstract forward guidance has been suggested as a form of commitment odyssean by the policymaker or as a way of conveying information delphic i analyze the interaction between households and the central bank as a game in which the central bank sends messages without private information the set of equilibrium payoffs is independent of any announcements pure odyssean forward guidance is redundant with private information communication can have social value forward guidance is well suited to leverage preexisting credibility to communicate a central bank s private information about its own preferences or beliefs

comment on a probability based stress test of federal reserve assets and income by jens h e christensen jose a lopez and glenn d rudebusch

extensive margins and the demand for money at low interest rates we argue that the relevant monetary decision for the majority of u s households is not the fraction of assets to be held in interest bearing form but whether to hold any such assets at all we call this the decision to adopt the financial technology we show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets this implies that the interest elasticity of household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations we do so with the 1989 survey of consumer finances we find that a the elasticity of money demand is very small when the interest rate is small b the probability that a household holds any amount of interest bearing assets is positively related to the level of financial assets and c the cost of adopting financial technologies is negatively related to participation in a pension program at intere

the mystique surrounding the central bank s balance sheet applied to the european crisis abstract a central bank s resource constraint bounds the dividends it can distribute by the present value of seignorage which is a modest share of gdp this is in spite of the mystique behind a central bank s balance sheet moreover the statutes of the federal reserve or the ecb make it difficult for it to redistribute resources across regions in a simple model of sovereign default where multiple equilibria arise if debt repudiation lowers fiscal surpluses the central bank may help to select one equilibrium the central bank s main lever over fundamentals is to raise inflation but otherwise the balance sheet gives it little leeway

fiscal requirements for price stability maintaining price stability requires not only commitment to an appropriate monetary policy rule but an appropriate scal policy rule as well ricardian equivalence does not imply that scal policy is irrelevant except in the case of a certain class of policies ricardian policies the role of scal developments in inflation determination under a non ricardian regime is illustrated through an analysis of the bond price support regime of the 1940s a monetary scal regime with attractive properties would combine a taylor rule for monetary policy with nominal decit targeting as a scal policy commitment

the perils of taylor rules abstract since john taylor s 1993 carnegie rochester conf ser publ policy39 195 214 seminal paper a large literature has argued that active interest rate feedback rules that is rules that respond to increases in inflation with a more than one for one increase in the nominal interest rate are stabilizing in this paper we argue that once the zero bound on nominal interest rates is taken into account active interest rate feedback rules can easily lead to unexpected consequences specifically we show that even if the steady state at which monetary policy is active is locally the unique equilibrium typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap that is a steady state in which the nominal interest rate is near zero and inflation is possibly negative journal of economic literature classification numbers e52 e31 e63

a bilevel programming approach to determining tax credits for biofuel production abstract this paper presents a bilevel programming formulation of a leader follower game that can be used to help decision makers arrive at a rational policy for encouraging biofuel production in the model the government is the leader and would like to minimize the annual tax credits it allows the petro chemical industry for producing biofuels the crops grown for this purpose are on land now set aside and subsidized through a different support program the agricultural sector is the follower its objective is to maximize profits by selecting the best mix of crops to grow as well as the percentage of land to set aside two solution algorithms are developed the first involves a grid search over the tax credit variables corresponding to the two biofuels under consideration ester and ethanol once these values are fixed nonfood crop prices can be determined and the farm sector linear program solved the second algorithm is based on an approximate nonlinear programming nlp formulation of the bilevel program an engineering approach is taken where the discontinuities in the government s problem are ignored and the farm model is treated as a function that maps nonfood crop prices into allocation decisions results are given for an agricultural region in the northern part of france comprising 393 farms

currency composition of foreign exchange reserves abstract this paper analyses the factors that govern the choice of the currency composition of official foreign exchange reserves first we introduce a new panel dataset on the key currencies in foreign exchange reserves of about 60 economies in the 1999 2017 period second we show that the currency composition of reserves relates strongly to the co movement of the domestic currency with key currencies and the currency invoicing of trade these factors represent attributes of the dollar or the euro rather than of the united states or the euro area they exert about equal effects on the currency composition of foreign exchange reserves we demonstrate that these findings are robust to a host of other possible factors

reverse speculative attacks abstract in january 2015 in the face of sustained capital inflows the swiss national bank abandoned the floor for the swiss franc against the euro a decision which led to the appreciation of the swiss franc the objective of this paper is to present a simple numerical framework that helps to better understand the timing of this episode which we label a reverse speculative attack we model a central bank which wishes to maintain a peg and responds to increases in demand for domestic currency by expanding its balance sheet in contrast to the classic speculative attacks which are triggered by the depletion of foreign assets reverse attacks are triggered by the concern of future balance sheet losses our key result is that the interaction between the desire to maintain the peg and the concern about future losses can lead the central bank to first accumulate a large amount of reserves and then to abandon the peg just as we have observed in the swiss case

the effectiveness of the ecb s unconventional monetary policy comparative evidence from crisis and non crisis euro area countries abstract during the european financial crisis the european central bank implemented a series of unconventional monetary policy measures we argue that these programs lowered the bond yield spreads of euro area countries this hypothesis is tested using pooled ols estimations and two different datasets monetary policy event dummies and the purchase volumes of the securities markets programme smp overall we find significantly negative effects on bond yield spreads for both datasets leading us to accept the hypothesis while the omt reduces the spreads of both crisis and non crisis countries ltros and the lowering of the deposit rate to 0 percent are mainly effective in non crisis countries the smp lowers the spreads of crisis countries but it has the opposite effect on non crisis countries this converse effect is explained by the risk that increasingly accumulates on the ecb s balance sheet through the smp and that way constitutes a fiscal risk for non crisis countries the results are confirmed by pooled ols estimations that measure the effect of unconventional monetary policy on central government debt

perils of unconventional monetary policy abstract unconventional monetary policy by relaxing restrictions on the composition of the balance sheet of the central bank compromises control over the stochastic path of inflation or in open economies over the stochastic path of exchange rates if the composition of the balance sheet is unrestricted then the path of inflation is indeterminate this is the case under pure quantitative easing where the target is the size of real money balances in contrast credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought and thus can implement a determinate path of inflation the composition of the portfolios traded by monetary fiscal authorities also determines premia in asset and currency markets

on the fit of new keynesian models this article provides new tools for the evaluation of dynamic stochastic general equilibrium dsge models and applies them to a large scale new keynesian model we approximate the dsge model by a vector autoregression and then systematically relax the implied cross equation restrictions and document how the model fit changes we also compare the dsge model s impulse responses to structural shocks with those obtained after relaxing its restrictions we find that the degree of misspecification in this large scale dsge model is no longer so large as to prevent its use in day to day policy analysis yet is not small enough to be ignored

risk endogeneity at the lender investor of last resort abstract to what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations to study this question we develop a risk measurement framework to infer the time variation in portfolio credit risks at a high weekly frequency focusing on the eurosystem s experience during the euro area sovereign debt crisis between 2010 and 2012 we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill overs across policy portfolios this caused overall risk to be nonlinear in exposures in some instances the eurosystem reduced its overall balance sheet credit risk by doing more in line with bagehot s well known assertion that occasionally only the brave plan is the safe plan