can money matter for interest rate policy in this paper it is shown that money can matter for macroeconomic stability under interest rate policy when transactions frictions are non negligible we develop a sticky price model with a shopping time function which induces the marginal utility of consumption to depend on the predetermined stock of money held at the beginning of the period equilibrium stability and uniqueness are then ensured by a passive interest rate policy whereas activeness is associated with an explosive equilibrium by reacting to changes in beginning of period real balances the central bank can restore stability interest rates further depend on lagged real balances even if the central bank acts in an entirely forward looking way as under discretionary optimization if the model is revised such that end of period money provides transaction services money can in principle be neglected for a stabilizing interest rate policy discretionary monetary policy is however likely to be associated with equilibrium indeterminacy which can be avoided if interest rates are set contingent on beginning of period real balances

maintaining low inflation money interest rates and policy stance abstract this paper presents a systematic empirical relationship between money and subsequent prices and output using us euro area and swiss data since the 1960 1970s monetary developments unlike interest rate stance measures are shown to provide qualitative and quantitative information on subsequent inflation the usefulness of monetary analysis is contrasted to weaknesses in modeling monetary policy and inflation with respectively short term interest rates and real activity measures the analysis sheds light on the recent change in inflation volatility and persistence as well as on the phillips curve flattening and reveals drawbacks in pursuing a low inflation target without considering monetary aggregates

is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

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

investigating m3 money demand in the euro area abstract euro area monetary growth has exceeded its target since 2001 likewise recent empirical studies did not find evidence in favour of a stable long run money demand function in contrast to the bulk of the literature we are able to identify a stable long run money demand relationship this result is obtained when the analysis is done without the short run homogeneity restriction between money and prices the basic equation can be improved by allowing for asymmetric adjustment in a low inflation environment opportunity costs of holding money have decreased thus the apparent monetary overhang is reconciled within standard models

the eurosystem the u s federal reserve and the bank of japan similarities and differences the paper provides a systematic comparison of the eurosystem the u s federal reserve and the bank of japan these monetary authorities exhibit somewhat different status and tasks which reflect different historical conditions and national characteristics however widespread changes in central banking practices in the direction of greater independence and increased transparency as well as changes in the economic and financial environment over the past 15 20 years have contributed to reduce the differences among these three world s principal monetary authorities a comparison based on simple over the counter policy reaction functions shows no striking differences in terms of monetary policy implementation

the monetary policy of the european central bank the first six years of ecb monetary policy are examined using a general framework that allows central bankers to weight differently positive and negative deviations of inflation output and the interest rate from their reference values the empirical analysis on synthetic euro area data suggests that the objective of price stability is symmetric whereas the objectives of real activity and interest rate stabilizations are not output contractions imply larger policy responses than output expansions of the same size while movements in the interest rate are larger when the level of the interest rate is relatively high the hypothesis of m3 growth rate targeting is rejected

is inflation always and everywhere a monetary phenomenon using a sample of about 160 countries over the last 30 years we test for the quantity theory relationship between money and inflation when analysing the full sample of countries we find a strong positive relation between long run inflation and the money growth rate the relation is not proportional however the strong link between inflation and money growth is almost wholly due to the presence of high or hyper inflation countries in the sample the relationship between inflation and money growth for low inflation countries on average less than 10 per annum over the last 30 years is weak

asymmetric reaction functions for the euro area this paper offers a preliminary evaluation of ecb conduct of monetary policy by estimating a fairly general reaction function for the euro area the specification of the policy rule embodies a number of nonlinearities which are shown to stem from asymmetric preferences and a convex aggregate supply curve asymmetric preferences allow but do not require policy makers to weight differently positive and negative deviations of inflation and output from the reference values and translate into an asymmetric reaction function the empirical analysis on monthly euro area aggregated data over the last 5 years reveals that ecb monetary policy is effectively described by a nonlinear policy rule according to which output contractions have required a larger policy response than output expansions moreover actual movements in the euro interest rate closely resemble the simulated path that a bundesbank type of behaviour would have implied copyright 2003 oxford university press

a test of lazear s theory of delayed payment contracts according to lazear workers and firms enter into long term implicit contracts that discourage shirking and malfeasance by shifting compensation to the end of the contract such delayed payment contracts are less likely to occur in jobs in which it is comparatively simple to monitor worker effort this paper uses data from the national longitudinal survey and the dictionary of occupational titles to test that hypothesis in particular it tests whether jobs that involve repetitive tasks tend to be characterized by an absence of pensions mandatory retirement long job tenures and high wages for older workers

the two pillars of the european central bank i interpret the european central bank s two pillar strategy by proposing an empirical model for inflation that distinguishes between the short and long run components of inflation the latter component depends on an exponentially weighted moving average of past monetary growth and the former on the output gap estimates for the 1971 2003 period suggest that money can be combined with other indicators to form the broadly based assessment of the outlook for future price developments that constitutes the ecb s second pillar however the analysis does not suggest that money should be treated differently from other indicators while money is a useful policy indicator all relevant indicators should be assessed in an integrated manner and a separate pillar focused on monetary aggregates does not appear necessary stefan gerlach

analysis of wage flexibility across the euro area evidence from the process of convergence of the labour income share ratio this article analyses wage flexibility as a factor in the unemployment rate across 12 euro area countries we use extensive evidence pertaining to the countercyclical behaviour of the labour income share ratio to estimate its equilibrium value in the long run this measure is calculated using a hybrid new keynesian phillips curve additionally by using spatial econometrics we can incorporate into the study the interdependence in the inflation among the countries as a result we identify countries that might see an improvement in their employment rates by improving their wage flexibility we also identify countries with high unemployment that is not a consequence of a lack of wage flexibility

long run estimates of money demand new evidence from east asian countries and the presence of structural breaks conventionally the money demand function is estimated using a linear regression of the logarithm of money demand on a number of variables in this article we aim to estimate the long run properties of money demand specification for a number of east asian economies and within a panel framework with the presence of structural breaks various country specific coefficients are allowed to capture inter country heterogeneities consistent with theoretical postulates it is found that a the demand for money in the long run positively responds to real income and inversely to the interest rate spread inflation the real effective exchange rate and the us real interest rate b the long run income elasticity is greater than unity and c both the currency substitution and capital mobility hypotheses hold the empirical findings in this article can provide useful policy guidelines to the east asian countries central banks in their quest for price stability if one of the primary objectives of these countries

the economic functions of private pensions an empirical analysis this paper presents an empirical analysis of the economic functions of defined benefit db pensions firms providing pensions choose between db and defined contribution formats the latter is essentially a tax preferred savings account the former may fill other roles determinants of firms choice of plan are estimated using plan sponsors reports to the internal revenue service firms that are larger are unionized employ mainly one sex invest in specific training and pay lower wages are more likely to provide db coverage these results suggest that the economic role of pensions is broader than mere provision of tax preferred savings accounts

pensions and wages an hedonic price theory approach this paper examines whether a trade off exists between the level of pension benefits and wages the 1983 survey of consumer finance is used to match detailed information on pension plans to worker characteristics for a random sample of the population the pension wage tradeoff is estimated using both a contractual model of the labor market and the spot market model used in previous studies the results indicate a large negative tradeoff in the contractual model but only a negligible tradeoff in the spot market model results from estimating the underlying structural equations for pensions are also presented copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

investigating m3 money demand in the euro area new evidence based on standard models monetary growth in the euro area has exceeded its target level especially since 2001 likewise recent empirical studies did not find evidence in favour of a stable long run relationship between the variables entering the money demand function instead the equation appears to be increasingly unstable if more recent data are included since the link between money balances and macroeconomic variables seems to has become rather fragile these results put serious doubts concerning the rationale of monetary aggregates in the monetary policy strategy of the ecb however if the analysis is done without imposing a short run homogeneity restriction between money and prices a stable long run money demand relationship can be identified where recursively estimated parameters are almost stable in addition the corresponding error correction model survives a wide array of specification tests including procedures for nonlinearities and parameter instability hence the apparent monetary overhang is in line with standard models of money demand behaviour and is not expected to lead to a rise in inflation

self enforcing contracts shirking and life cycle incentives he labor market is a rich and complicated place when a worker takes a job he expects to earn a wage but will also care about rates of wage growth fringe benefits levels of risk retirement practices pensions promotion and layoff rules seniority rights and grievance procedures in return the worker must give up some time but he is also asked to upgrade his skills train other workers provide effort and ideas and defer to authority in questions of how his time is spent great changes are occurring in the way labor market institutions such as these are modelled central to the new approach is the concept of a self enforcing implicit contract this is the latest in a series of variations on the ideas of azariadis 1975 baily 1974 and gordon 1974 and is one of the more exciting new developments in the theory of labor markets this essay will outline this approach and evaluate some of its accomplishments the ideas will be presented in the context of an incentive model that is of some independent interest the model was introduced by becker and stigler 1974 and was extended by lazear 1979 to account for wage growth and mandatory retirement in these papers the workers retire at a fixed age lending the name life cycle incentives to the approach more recently shapiro and stiglitz 1984 have used a version without a fixed retirement date to account for unemployment this version is often called the shirking model these models have generated some controversy but much of it can be resolved when the models are presented in the framework of self enforcing contracts in fact this simple incentive model can do even more it can provide a rationale for competitive hierarchies where firms place their workers in competition with

the excess sensitivity of layoffs and quits to demand excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements the specific nature of worker firm relations creates a situat

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

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

what does the bundesbank target abstract although its primary ultimate objective is price stability the bundesbank has drawn a distinction between its money focused strategy and the inflation targeting approach recently adopted by a number of central banks we show that holding constant the current forecast of inflation german monetary policy responds very little to changes in forecasted money growth we conclude that the bundesbank is much better described as an inflation targeter than as a money targeter an additional contribution of the paper is to apply the structural var methods of b bernanke and i mihov measuring monetary policy working paper no 5145 national bureau of economic research cambridge ma june 1995 to determine the optimal indicator of german monetary policy we find that the lombard rate has historically been a good policy indicator although the use of the call rate as an indicator cannot be statistically rejected

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

an augmented p star model of indian inflation abstractan augmented p star model is estimated and tested to identify the drivers of inflation in india the model includes monetary and non monetary factors demand pull and cost push factors and

indicator variables for optimal policy the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment an example of optimal monetary policy with a partially observable potential output and a forward looking indicator is examined the optimal response to the optimal estimate of potential output displays certainty equivalence whereas the optimal response to the imperfect observation of output depends on the noise in this observation

positioning the world bank this article examines the rationale for the world bank and explores whether its objective is best served by its current mix of activities we are critical of the bank s reliance on conditionality and advocate evolution into a knowledge bank which would lend with few conditions to countries with good policies and good institutions and would concentrate on the provision of knowledge and technical assistance rather than lending in countries where the policy framework is poor we also advocate an expansion in the bank s role as a provider of global public goods we critically examine the banks role in relation to financial crises

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

opportunistic behavior by firms in implicit pension contracts several studies have established that under the most common form of pension coverage benefits accrue disproportionately near the end of a worker s career such backloading establishes a penalty for early quitting but may also create an incentive for opportunistic firm behavior because benefits generally are a function of highest earnings when nominal earnings are expected to rise an employer can reduce pension liabilities by discharging workers prior to retirement this paper uses the national longitudinal survey of mature men to test whether such actions by employers are systematic we estimate that pension covered workers with mean losses are less likely to be discharged unexpected increases in pension losses due to increases in inflation however raise the risk of discharge we find no evidence that the minimum vesting standards of the employees retirement income security act reduces the likelihood of discharge for older workers who previously were not vested these results are consistent with an implicit pension contract under which employer compliance is enforced by reputation

asymmetric size dependent effects of the output gap on inflation us evidence from the last half a century this article examines asymmetric size and sign dependent effects of the output gap on the us quarterly inflation rate using data from the last half a century 1959q2 2013q1 consistent with previous studies it is found that the consumer price index is cointegrated with the unit labour cost and the price of oil a short run dynamic model is then estimated in which variations in the output gap are divided into three groups large positive large negative and small medium positive negative the results provide convincing evidence that only sufficiently large positive or negative variations of the output gap can significantly influence inflation put otherwise relatively small to medium changes in the output gap exert no significant impact on inflation and if not separated they can somewhat obscure the significant effects associated with large variations of the output gap this study can lead to greater consensus on the inflation output gap nexus the findings remain robust despite the use of differen

the educational and professional background of central bankers and its effect on inflation an empirical analysis we assume that central banks can control inflation so that inflation rates reflect the preferences of the central bank council the hypothesis to be tested is that these preferences depend on the central bankers educational and or professional background in a panel data analysis for the euro area and eleven countries since 1973 we explain inflation either by the weights with which the educational and professional characteristics of the 391 council members were represented in the various central bank councils or by the education or profession of the median council members control variables are added using professional background weights we find that former members of the central bank staff and in some specifications former insurance executives commercial bankers other businessmen and public servants prefer significantly lower inflation rates than former union leaders and politicians do in the median voter analysis former central bankers commercial bankers businessmen and public servants are also significantly more inflation averse than economic scholars as for the education of the council members our results are less robust however if the median member of the central bank council has studied business the inflation rate is significantly lower than if she has studied economics taking educational and professional background together central banks seem to attract or produce primarily economists who are monetary conservatives whereas keynesian economists are more prominent in academia jel classification e42 e58

a small estimated euro area model with rational expectations and nominal rigidities abstract we estimate a small model of the euro area to be used for evaluating alternative monetary policy strategies starting with the relationship between output and inflation we compare the fit of the nominal wage contracting model due to taylor j political econom 88 1980 1 and the relative real wage contracting model proposed by buiter and jewitt the manchester school 49 1981 211 reprinted in buiter ed macroeconomic theory and stabilization policy manchester university press manchester 1989 and estimated with u s data by fuhrer and moore quart j econom 110 1995 127 while fuhrer and moore reject nominal contracts in favor of relative contracts which induce more inflation persistence we find that both specifications fit euro area data reasonably well when considering france germany and italy separately however we find that nominal contracts fit german data better while the relative contracting model does well with respect to formerly high inflation countries such as france and italy we close the model by estimating an aggregate demand relationship and investigate the implications of nominal versus relative contracts for the inflation output variability tradeoff when monetary policy follows taylor s rule

price stability and the ecb s monetary policy strategy abstract this paper focuses on the price stability objective within the framework of the single monetary policy strategy it starts by reviewing what this objective which is common to all central banks means second this paper focuses exclusively on the anchoring of short to medium term inflation expectations part 2 several measures show that this anchoring is effective a two pillar small structural macro economic model framework is used to analyze the impact that this anchoring of expectations has on the determination of the short to medium term inflation rate from this point of view observed inflation in the euro area seems to be in line with the theory and the ecb s action seems to be very effective third we focus on the other aspect of monetary stability the degree of price level uncertainty and the anchoring of inflation expectations in the medium to long term even though this assessment is more difficult than it is in the short to medium term since we only have a track record covering 6 years various indicators from the theoretical analysis paint a fairly reassuring picture of the effectiveness of the device used by the ecb

the gender gap in pensions and wages this study provides rationale for the underrepresentation of women in the pension sector and examines the consequences for the gender wage gap for a given set of observed characteristics a woman is 11 19 percent less likely than a man to have a pension of the unexplained portion of the gender wage gap 10 38 percent is due to unexplained differences in pension coverage finally consistent with a screening effect of pensions women are paid more equally in the pension sector copyright 1990 by mit press

money and inflation in the euro area a case for monetary indicators abstract this paper examines inflation indicators for the euro area by studying the relationship between inflation output money and interest rates using data spanning 1980 2001 the central finding is that both the output gap and the real money gap the difference between the real money stock and the long run equilibrium real money stock contain considerable information regarding future inflation in contrast the eurosystem s money growth indicator the difference between nominal money growth and a reference value the prominent first pillar in its monetary strategy contains little information about future inflation and no information beyond that contained in the output and real money gaps the predictive performance of the output gap has improved compared to that in a previous version of this paper most likely because of better estimation methods

inflation and money in colombia another p star model this document presents the estimation of a recent version of the p star model by gerlach and svensson 2003 and its predictions for colombia january 1980 to april 2005 the model is designed to explain the inflation gap observed rate minus the target based on the monetary gap and the output gap according to the results the output gap lacks significant effects while the monetary gap has significant positive effects on inflation

economic policy uncertainty and demand for money in australia abstractthe demand for money has received a great deal of attention in the empirical literature this literature however has emphasized factors such as interest rate income inflation rate and e

output gaps and monetary policy in the emu area abstract several considerations suggest that the ecb may respond to emu wide output gaps in setting policy estimated reaction functions indicate that central banks respond to output gaps a taylor rule in which the central bank responds to inflation and the gap accounts for recent movements in interest rates in the emu area and optimal control exercises conducted in estimated econometric models suggest that reacting to the gap may be optimal even if the central bank cares solely about inflation in this paper we obtain point estimates with associated confidence bands of the emu wide output gap using uc models

targeting inflation with a role for money this paper demonstrates how a target for money growth can be beneficial for an inflation targeting central bank acting under discretion because the growth rate of money is closely related to the change in the interest rate and the growth of real output delegating a money growth target to the central bank makes discretionary policy more inertial leading to better social outcomes this delegation scheme is also compared with other schemes suggested in the literature the results indicate that stabilizing money growth around a target can be a sensible strategy for monetary policy although other delegation schemes are often more efficient

implicit contracts explicit contracts and wages over the past decade the search for an explanation of aggregate money wage stickiness in the face of substantial shifts in the marginal revenue product of labor of the kind that was associated with an increase in real wages in the depression of the 1930 shas led to an extensive examination of explicit union and implicit nonunion employment contracting arrangements this distinction can be exaggerated long term union contracts have an implicit element in the sense that they specify only a limited number of contingencies to which wages will be adjusted moreover the implicit contracting branch of the literature has pushed in the direction of implying that the explicit contracts observed in the union sector may be formalizations of common informal arrangements in the nonunion sector so that differences between the sectors in the behavior of wages and employment may be more apparent than real the purpose of this paper is to examine the empirical basis for some of the key propositions of implicit contract theories and to note some important differences in the outcome of implicit and explicit contracting

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

euro area money demand and international portfolio allocation a contribution to assessing risks to price stability this chapter argues that a stable broad money demand for the euro area over the period 1980 2011 can be obtained by modelling cross border international portfolio allocation we first observe that in this first decade of the new millennium the breakdown of standard money demand specifications for the euro area and the strong developments in annual m3 growth coincide with large net flows in portfolio invest ment in the euro area we then estimate a new money demand which turns out to be stable by including variables explaining portfolio flows omitted in the traditional specifications

deflation and monetary policy in a historical perspective remembering the past or being condemned to repeat it inflation is currently low and stable in industrialized countries but might deflation replace inflation as a major policy concern we present a broad cross country historical study of deflation over the past two centuries in order to shed light on current policy challenges in the light of the relevant theoretical approaches we empirically characterize good bad and ugly deflations assess similarities between the current low inflation environment and that of the gold standard period and discuss lessons from the historical record as to policies to escape undesirable deflation and the relative merits of interest rate and monetary instruments michael bordo and andrew filardo

scale economies in private multi employer pension systems this paper examines the efficiency of pension plan operations in the private sector focusing on the relationship between plan size and administrative expenses of pension fund management the autho

workers trust funds and the logic of wage profiles this paper defines a concept a worker s trust fund which is useful in analyzing optimal age earnings profiles the trust fund represents what a worker loses if dismissed from a job for shirking in considering whether to work or shirk a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort this concept is used to show that the implicit bonding in upward sloping age earnings profiles is not a perfect substitute for an explicit up front performance bond or employment fee it is also shown that the second best optimal earnings profile in the absence of an up front employment fee pays total compensation in excess of market clearing in a variety of stylized cases

labor contracts with voluntary quits this paper considers labor contracts between the risk neutral firm and risk averse workers with heterogeneous outside opportunities alternative wages which become known to the worker after a costly on the job search in the case of a deterministic alternative wage self selection over a menu of contract wages would achieve the first best contract if the alternative wages are stochastic the second best contract emerges as a trade off between productive efficiency and risk sharing workers who voluntarily search are fewer and workers who search are less likely to quit if the search effort is not monitored even fewer workers search

the robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the european central bank abstract this paper examines the implications of recent research on monetary policy rules for practical monetary policy making with special emphasis on strategies for setting interest rates by the european central bank ecb the paper draws on recent research and new simulations of a large open economy model to assess the efficiency of a simple benchmark rule in comparison with other proposed rules further it stresses new results on the robustness of monetary policy rules in which each rule that is optimal or good according to one model or researcher is tested for robustness by other researchers using different models because of the large increase in the number of economists focussing on econometric evaluation of monetary policy rules for the interest rate instrument and because of the parallel increase in the variety of models being developed for this purpose much more evidence is becoming available on the robustness of simple monetary policy rules for the interest rate than ever before

predicting inflation does the quantity theory help i introduction inflation forecasting has played a key role in recent u s monetary policy and this has led to a renewed search for variables that serve as good indicators of future inflation one frequently used indicator based on the phillips curve is the unemployment rate or a similar measure of the output gap as in gerlach and svensson 2003 clark and mccracken 2003 mankiw 2001 and gali and gertler 1999 the phillips curve is believed by many to be the preferred tool for forecasting inflation see e g mankiw 2001 stock and watson 1999a blinder 1997 though as argued by sargent 1999 its use in formulating monetary policy is not without controversy another approach based on the quantity theory of money uses monetary aggregates to predict inflation despite the strong theoretical motivation for this approach though there is little evidence that measures of the nominal money supply are useful for predicting inflation relative to a conventional unemployment rate phillips curve model see stock and watson 1999a for a detailed analysis of the forecast performance of popular inflation indicators stock and watson s results indicate that even simple univariate time series models generally forecast about as well as models that include measures of the money supply so that it is hard to make the case that nominal money supply data have any predictive content for inflation 1 this article evaluates inflation forecasts made by models that allow for prices money and output to be cointegrated and in the process reexamines the question of whether monetary aggregates have marginal predictive content for inflation our work is motivated in part by economic theory as the presence of a cointegrating relationship among the series we look at corresponds to an implicit assumption that prices the money supply and output hang together in the long run an implicit feature of most analyses based on the quantity theory from a statistical point of view a system with cointegrated regressors does not have a finite order vector autoregressive var representation so that a var in differences will be misspecified and may not forecast well regardless of the relevance of the included variables our analysis is therefore focused on the questions are there gains in terms of forecast accuracy from imposing the restriction that prices money and output are cointegrated does it matter whether cointegrating restrictions are imposed a priori based on economic theory or can they be estimated and do models imposing cointegration among prices money and output forecast inflation as well as the phillips curve and other alternative models the econometric framework that we employ is similar to that of stock and watson 1999a but differs from theirs in two ways first stock and watson 1999a consider one year horizon inflation forecasts whereas we consider forecast horizons of up to five years this is potentially important in our context as we include versions of the quantity theory of money in our analysis a theory that arguably may not yield substantive gains to forecasting in the short run additionally future inflation at many horizons is in general of interest to policy makers even if the weight attached to inflation at different horizons is a matter of individual preference so that long run predictions are only unuseful if and when they fail to have marginal predictive content for inflation 2 a second difference between our work and that of stock and watson 1999a is that some of our models differ from theirs including those that impose quantity theory based cointegrating restrictions for example in these types of models we 1 impose a cointegration restriction derived from the assumption of stationary velocity and 2 estimate cointegrating restrictions we also examine a fairly broad variety of linear models including simple autoregressive ar models in levels and differences conventional unemployment rate phillips curve models and var models in levels and differences with money prices and output

monetary targets as a policy rule lessons from the swiss experience abstract this paper provides a survey and analysis of swiss monetary policy since the shift to a floating exchange rate in 1973 although the swiss national bank snb by international comparison managed to achieve a high degree of price stability it could not prevent temporary bursts of inflation i argue that the problem lay in an inappropriate snb response to such disturbances as unexpected exchange rate shocks and show that in constructing optimum feedback rules the snb must take account of the logs in the effects of monetary policy i also discuss the snb s current strategy resting on a medium term growth target for the monetary base

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

pension portability and labor market efficiency a survey of the literature this paper reviews the theoretical and empirical literature evaluating the labor market effects of policies to enhance pension portability one perspective is that reducing the cost of job change w

information variables for monetary policy in an estimated structural model of the euro area a small scale new keynesian model for the euro area is estimated with maximum likelihood under the assumptions of imperfect information and discretionary monetary policy the estimated parametrization of this widely used dynamic stochastic model unveils the monetary authorities objectives and the information content of two indicator variables monetary aggregates and real unit labour costs the results highlight a significant policy concern about interest rate smoothing and inflation almost no concern for output gap stabilization emerges regarding indicator variables unit labour costs provide information on potential output that is helpful for stabilization policy no useful information role emerges for monetary aggregates

the information content of money in forecasting euro area inflation this article contributes to the debate on the role of money in monetary policy by analysing the information content of money in forecasting euro area inflation we compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using bayesian and other estimation techniques we find that money contains relevant information for inflation in some model classes money based new keynesian dynamic stochastic general equilibrium dsge models and vector autoregressions vars incorporating money perform better than their cashless counterparts but there are also indications that the contribution of money has its limits the marginal contribution of money to forecasting accuracy is often small money adds little to dynamic factor models and it worsens forecasting accuracy of partial equilibrium models finally nonmonetary models dominate monetary models in an all out horserace

does global liquidity help to forecast u s inflation we construct a measure of global liquidity using the growth rates of broad money for the g7 economies global liquidity produces forecasts of us inflation that are significantly more accurate than the forecasts based on us money growth phillips curve autoregressive and moving average models the marginal predictive power of global liquidity is strong at three years horizons results are robust to alternative measures of inflation

the demand for m3 in the euro area in this paper an empirically stable money demand model for m3 in the euro area is constructed starting with a multivariate system three cointegrating relationships with economic content are found i the spread between the long term and the short term nominal interest rates ii the long term real interest rate and iii a long run demand for broad money m3 there is evidence that the determinants of m3 money demand are weakly exogenous with respect to the long run parameters hence following a general to specific modelling approach a parsimonious conditional error correction model for m3 money demand is derived which can be interpreted economically for the conditional model long run and short run parameter stability is extensively tested and not rejected copyright 2001 john wiley sons ltd

pensions and indenture premia the implicit pension contract has provided a theoretical basis for the observed relation between pensions less quitting and earlier retirement but it also has encountered difficulty explaining why wages seem too high in pension firms this anomaly has been taken by some to imply that efficiency wages not pension capital losses explain why quitting is abnormally low in defined benefit pensions in this paper i pursue an alternative explanation that the implicit contract model is oversimplified because it ignores supply conditions facing long tenure firms i show that once an allowance is made for compensation required by workers for entering long term labor contracts numerous anomalous empirical observations in the pension market are explicable

discussion of putting m back in monetary policy by eric leeper and jennifer roush the european central bank assigns a prominent role for money and monetary analysis in its monetary policy strategy it will therefore not come as a surprise that i am very sympathetic to the general theme of eric leeper and jennifer roush s paper indeed let us put m back in monetary policy in this paper leeper and roush 2003 this issue of jmcb show quite convincingly that explicitly allowing for a short term response of the policy controlled interest rate to money m2 rather than to contemporaneous output and prices as in the taylor rule helps identify the effects of exogenous monetary policy shocks in a monthly var it reduces the price and liquidity puzzle which is so often incurred in this type of exercise it increases the size and the persistence of the output and price effects of a monetary policy shock it improves the estimation of the short run money market supply and demand schedules and importantly these findings appear to be robust across various sub samples possibly with the exception of the most recent sub sample the bottom line is therefore let us put m back in the monetary policy reaction while i will not disagree with this conclusion and i will provide some additional evidence for the euro area in section 3 of this discussion it is worth asking why the estimated effects of policy shocks with a contemporaneous reaction to money are more plausible than those estimated in vars without such a role for money first is the price puzzle really a puzzle there is no full consensus about this in particular one can construct models in which contractionary monetary policy shocks have an initial positive effect on prices due to an interest rate cost channel e g christiano

money in an estimated business cycle model of the euro area this article examines the role of money in a small scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood the model allows for both intertemporal and intratemporal non separability in preferences we find first that real balances do not affect the marginal utility of consumption second money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price output and interest rates fluctuations third the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations

m3 money demand and excess liquidity in the euro area recent empirical studies have found evidence of unstable long run money demand functions if recent data are used if the link between money balances and the macroeconomy is fragile the rationale of monetary aggregates in the ecb strategy has to be doubted in contrast we present a stable long run money demand relationship for m3 for the period 1983 2006 to obtain the result the short run homogeneity restriction between money and prices is relaxed and a break in the income elasticity of money demand after 2001 is taken into account measures of excess liquidity do not show significant inflation pressures

equilibrium long term labor contracts the paper presents a labor market equilibrium analysis of implicit contract theory a two period single good model is used to propose consistent notions of labor market equilibrium for long term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs the result that long term contracts emerge in equilibrium even without mobility costs is novel and contrary to common beliefs the main features of equilibrium are that risk neutral firms will insure risk averse workers against downside risk yielding downward rigid wages wages are not fully rigid as in earlier work on contract theory because workers may quit and wages have to be bid up to retain them the firm gets its return of the insurance deal by paying less than marginal product in the first period the resulting equilibrium is second best and lies between productive efficiency and full insurance workers gain from long term contracts in comparison to spot markets whereas owners may not in the model with specialized skills there exist transfer payments such that both parties are better off within an equilibrium with long term contracts

inflation dynamics and food prices in ethiopia during the global food crisis ethiopia experienced an unprecedented increase in inflation among the highest in africa using monthly data over the past decade we estimate models of inflation to identify the importance of the factors contributing to cpi inflation and three of its major components cereal prices food prices and non food prices our main finding is that movements in international food and goods prices measured in domestic currency determined the long run evolution of domestic prices in the short run agricultural supply shocks affected food inflation causing large deviations from long run price trends monetary policy seems to have accommodated price shocks but money supply growth affected short run non food price inflation our results suggest that when analyzing inflation in developing economies with a large food share in consumer prices world food prices and domestic agricultural production should be considered omitting these factors can lead to biased results and misguided policy decisions

heterogeneous firms and the organization of production firms in the same industry exhibit systematic differences in the organization of production and the structure of employment entrepreneurial ability is the specific scarce input that limits the size of a firm this input must be allocated to two activities coordinating production and monitoring workers able entrepreneurs can convert calendar time into larger supplies of coordinating effort that enable them to assemble large firms greater ability implies a higher shadow price of time which increases the implicit costs of monitoring a dispersion of entrepreneurial abilities generates an equilibrium size distribution of firms differences in monitoring costs affect the choice of worker productivities the design of products and the organization of production the monitoring cost hypothesis advanced in this paper goes a long way in explaining the equilibrium of an industry containing heterogeneous firms that differ in size and behavior

optimal severance pay with incomplete information this paper contrasts optimal employment contracts in a world of full information and in a world in which the worker s alternative employment possibilities cannot be observed by the firm the difference between income and severance pay that is the opportunity cost of separating will be higher in more productive states of nature with complete wage insurance no longer possible we therefore have an explanation of higher ability individuals receiving high wages in the short run in long term contracts the explanation does not rely as past explanations have done on the imperfections in bonding arrangements or in loan markets

inflation and monetary dynamics in the us a quantity theory approach in this article we investigate the long run link between inflation and money growth in the united states since 1960 a measure of the long run inflation trend is constructed which bears the interpreation of monetary inflation rate and is directly related to the excess nominal money growth process money growth less output growth as postulated by the quantity theory consistent with the memory characteristics of the series their fractional integration and cointegration properties are taken into account in empirical modelling the proposed measure is then compared with several existing measures of core inflation aimed at capturing long run inflation dynamics but unrelated to money growth the monetary long run inflation rate performs well in out of sample forecasting exercises especially over a 2 3 year horizon yielding valuable information to monetary policymakers

encouraging long term tenure wage tilt or pensions the author analyzes data on 6 416 persons in 109 firms to determine whether the length of these workers tenure was positively related either to wage tilt the payment of below market wages in the early years of the worker s employment with a firm and above market wages in the later years or to the presence of defined benefit pension plans contrary to the popular but little tested hypothesis that wage tilt is important in inducing workers to make long term commitments to the firm the results show that wage tilt had no significant effect on tenure except indirectly through its effect on pension quit costs in contrast pensions increased tenure in the firm on average by more than 20