interest rates and money in the measurement of monetary policy over the last 25 years a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies in light of this work the federal reserve s recent policy of quantitative easing with its goal of affecting the supply of liquid assets appears to be a radical break from standard practice alternatively one could posit that the monetary aggregates when measured properly never lost their ability to explain aggregate fluctuations and for this reason represent an important omission from standard models and policy discussions in this context the new policy initiatives can be characterized simply as conventional attempts to increase money growth this view is supported by evidence that superlative divisia measures of money often help in forecasting movements in key macroeconomic variables moreover the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary

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

harvests and business cycles in nineteenth century america most major american industrial business cycles from around 1880 to the first world war were caused by fluctuations in the size of the cotton harvest due to economically exogenous factors such as weather wheat and corn harvests did not affect industrial production nor did the cotton harvest before the late 1870s the unique effect of the cotton harvest in this period can be explained as an essentially monetary phenomenon the result of interactions between harvests international gold flows and high powered money demand under america s goldstandard regime of 1879 1914

multiple solution indeterminacies in monetary policy analysis abstract a sizeable fraction of recent research on monetary policy has been concerned with issues relating to analytical indeterminacies i e multiple solutions in rational expectations re models most of the literature features sophisticated re analysis conducted within dynamic models that reflect optimizing behavior by individual agents and incorporate taylor style policy rules a few papers have suggested that some of the particular indeterminacy arguments are misleading or irrelevant for the most part however there has been little dissent from the position that these indeterminacies present a genuine problem for monetary policy makers the purpose of the present paper by contrast is to argue that conclusions based on multiple solution indeterminacy findings are of dubious merit rather generally

banking and interest rates in monetary policy analysis a quantitative exploration abstract the paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type the model is implemented quantitatively with a calibration based on us data it is reasonably successful in providing an endogenous explanation for substantial steady state differentials between the interbank policy rate and i the collateralized loan rate ii the uncollateralized loan rate iii the t bill rate iv the net marginal product of capital and v a pure intertemporal rate we find a differential of over 3 p a between iii and iv thereby contributing to resolution of the equity premium puzzle dynamic impulse response functions imply pro or counter cyclical movements in an external finance premium that can be of quantitative significance in addition they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4 p a also shocks to banking productivity or collateral effectiveness call for large responses in the policy rate

interest rates inflation and federal reserve policy since 1980 this paper characterizes federal reserve policy since 1980 as one that actively manages short term nominal interest rates in order to control inflation and evaluates this policy using a dynamic stochastic sticky price model of the united states economy the results show that the fed s policy insulates aggregate output from the effects of exogenous demand side disturbances and by calling for a modest but persistent reduction in short term interest rates following a positive technology shock helps the economy to respond to supply side disturbances as it would in the absence of nominal rigidities

theoretical analysis regarding a zero lower bound on nominal interest rates this paper explores several issues concerning a possible zero lower bound zlb including its theoretical rationale the magnitude of effects of low sustained inflation on real interest rates the validity of analyzing monetary policy in models with no monetary variables and the dynamic stabilizing properties of taylor rules in a zlb context the most important argument however is that if the short nominal rate is immobilized at zero there nevertheless exists a route for monetary stabilization policy to be effective via the foreign exchange market its quantitative importance is examined in a calibrated optimizing open economy model

money and the natural rate of interest structural estimates for the united states and the euro area abstract we examine the role of money in three environments the new keynesian model with separable utility and static money demand a nonseparable utility variant with habit formation and a version with adjustment costs for holding real balances the last two variants imply forward looking behavior of real money balances with forecasts of future interest rates entering current portfolio decisions we conduct a structural econometric analysis of the u s and euro area economies fiml estimates confirm the forward looking character of money demand a consequence is that real money balances are valuable in anticipating future variations in the natural interest rate

does money matter in shaping domestic business cycles an international investigation we study the contribution of money to business cycle uctuations in the us the uk japan and the euro area using a small scale structural monetary business cycle model constrained likelihood based estimates of the parameters are provided and time instabilities analyzed real balances are statistically important for output and in ation uctuations their contribution changes over time models giving money no role provide a distorted representation of the sources of cyclical uctuations of the transmission of shocks and of the events of the last 40 years

the effects of minimum wages on wage dispersion and employment evidence from the u k wages councils using data on wages council coverage from the united kingdom new earnings survey the authors examine the impact of mandated minimum wages on wage dispersion and employment in the united kingdom in the 1980s they find evidence that a dramatic decline in the toughness of the regulation imposed by the wages councils through the 1980s a decline that is in the level of the minimum wage relative to the average wage significantly contributed to widening wage dispersion over those years there is however no evidence of an increase in employment resulting from the weakening bite of the wages council minimum pay rates instead consistent with the conclusions of several recent u s studies the findings suggest that the minimum wage had either no effect or a positive effect on employment

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

monetary shocks and sticky wages in the u s great contraction a multi sector approach abstract we quantify the role of contractionary monetary shocks and nominal wage rigidities in the u s great contraction in contrast to conventional wisdom we find little increase in the economy wide real wage over 1929 33 although real wages rose significantly in some industries in the context of a two sector model with intermediates and nominal wage rigidities in one sector contractionary monetary shocks account for only a third of the fall in gdp intermediate linkages play an important role as the output decline without intermediates is almost a third larger at the trough the role of nominal wage rigidities beyond their interaction with monetary shocks is limited

reconsidering the role of money for output prices and interest rates abstract new keynesian models of monetary policy downplay the role of monetary aggregates in the sense that the level of output prices and interest rates can be determined without knowledge of the quantity of money this paper evaluates the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using a vector autoregression var shocks to monetary aggregates are identified by the restrictions suggested by new keynesian monetary models contrary to the theoretical predictions shocks to broad monetary aggregates have substantial and persistent effects on output prices and interest rates

on measuring child costs with applications to poor countries the theoretical basis for measuring child costs is discussed and detailed consideration is given to two straightforward procedures for calculation engel s food share method and rothbarth s adult good method each of these methods embodies different definitions of child costs so that the same empirical evidence can generate quite different estimates depending on the method used it is shown that true costs are generally overstated by engel s method and understated by rothbarth s procedure although the latter unlike the former can provide a sensible starting point for cost measurement our estimates from sri lankan and indonesian data suggest that children cost their parents about 30 40 percent of what they spend on themselves

a business cycle model with variable capacity utilization and demand disturbances abstract we develop a dynamic general equilibrium model with demand preference shocks estimated using hall s j labour economics 15 1997 223 residual that replicates u s business cycles well at least compared to the real business cycle models the key factor is cyclical capital utilization which is based on imperfect competition slow adjustments in capital stock and fixed requirement of labor input we also demonstrate theoretically that a representative agent economy with preference shocks could be viewed as the reduced form of a heterogeneous agents economy with incomplete markets specifically a heterogeneous agents economy with incomplete markets is aggregated into a representative agent economy with preference shocks this result would provide a microeconomic foundation for preference shock models it is also shown that a shock to marginal utility of consumption and a shock to marginal disutility of labor have different effects

a method for taking models to the data abstract this paper develops a method for combining the power of a dynamic stochastic general equilibrium model with the flexibility of a vector autoregressive time series model to obtain a hybrid that can be taken directly to the data it estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar us economy the stability of the real business cycle model s structural parameters and the performance of the hybrid model s out of sample forecasts

real balance effects timing and equilibrium determination this paper examines whether the existence and the timing of real balance effects contribute to the determination of the absolute price level as suggested by patinkin 1949 1965 and if they afiect conditions for local equilibrium uniqueness and stability i show that there exists a unique price level sequence that is consistent with an equilibrium under interest rate policy only if beginning ofperiod money yields transaction services predetermined real money balances can then serve as a state variable implying that interest rate setting must be passive a violation of the taylor principle for unique stable and non oscillatory equilibrium sequences on the contrary when the end of period money stock facilitates transactions the equilibrium displays nominal indeterminacy and equilibrium uniqueness requires an interest rate setting consistent with the taylor principle

the case for inflation stability abstract we evaluate the case for inflation stabilization in a new keynesian nns model that includes various frictions capital accumulation and a variety of shocks in such a model price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs we find that such an opportunity is of limited value and that a strong case for perfect inflation stabilization remains policies that tolerate a small amount of inflation variability may outperform perfect inflation targeting when capital adjustment costs are low and the monetary distortion is substantial but only if prices are very flexible

transactions cost and interest rate rules this paper evaluates quantitatively the effect of real money balances in a new keynesian framework money in our model facilitates transactions and is introduced through a transactions cost technology this technology acts like a distortionary consumption tax which varies endogenously with the nominal interest rate in this setup the resultant phillips curve becomes a function of the nominal interest rate our analysis has important policy implications first we find unlike woodford 2003 accounting for realbalance effects does not result in the policy maker s loss function having an interest rate smoothing term second we show that in the case of a temporary shock to productivity the optimal policy response under discretion is to allow for a trade off between inflation and the output gap this trade off arises endogenously in our model the quantitative effects on the macroeconomic variables are found to be significant

on the sources of macroeconomic stability in the euro area in the mid 1990s the euro area experienced a change in macroeconomic volatility around the same time at business cycle frequencies the correlation between inflation and money growth changed markedly turning from positive to negative distinguishing the periods pre and post 1994 we estimate a dynamic stochastic general equilibrium model with money for the euro area the model accounts for the salient facts we then perform several counterfactual exercises to assess the drivers of these phenomena the moderation of real variables was essentially due to relatively smaller shocks to investment wage markups and preferences the apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti inflationary and gradual monetary policy

optimal interest rate stabilization in a basic sticky price model this paper studies optimal monetary policy with the nominal interest rate as the single policy instrument firms set prices in a staggered way without indexation and real money balances contribute separately to households utility the optimal deterministic steady state under commitment is the friedman rule even if the importance assigned to the utility of money is small relative to consumption and leisure we approximate the model around the optimal steady state as the long run policy target optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle

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

money and output friedman and schwartz revisited more than fifty years ago friedman and schwartz examined historical data for the united states and found evidence of pro cyclical movements in the money stock which led corresponding movements in output we find similar correlations in more recent data these appear most clearly when divisia monetary aggregates are used in place of the federal reserve s official simple sum measures when we use information in divisia money to estimate a structural vector autoregression identified monetary policy shocks appear to have large and persistent effects on output and prices with a lag that has lengthened considerably since the early 1980s

interest rates and inflation a consensus has emerged among practitioners that the instrument of monetary policy ought to be the short term interest rate that policy should be focused on the control of inflation and that inflation can be reduced by increasing short term interest rates at the center of this consensus is a rejection of the quantity theory such a rejection is a difficult step to take given the mass of evidence linking money growth inflation and interest rates increases in average rates of money growth are associated with equal increases in average inflation rates and interest rates these observations need not rule out a constructive role for the use of short term interest rates as a monetary instrument one possibility is that increasing short term rates in the face of increases in inflation is just an indirect way of reducing money growth sell bonds and take money out of the system another possibility is that while control of monetary aggregates is the key to low long run average inflation rates an interest rate policy can improve the short run behavior of interest rates and prices the shortrun connections among money growth inflation and interest rates are very unreliable so there is much room for improvement these possibilities are surely worth exploring but doing so requires new theory the analysis needed to reconcile interest rate policies with the evidence on which the quantity theory of money is grounded cannot be found in old textbook diagrams

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

money supply and capital accumulation on the transition path revisited fischer 1979 and asako 1983 analyze the sign of the correlation between the growth rate of money and the rate of capital accumulation on the transition path both plug a constant relative risk aversion utility based on a cobb douglas and a leontief function respectively into sidrauski s model yet return contrasting results the present analysis by using a more general ces utility presents both of those settings and conclusions as limiting cases and generates economic figures more consistent with reality e g the interest rate elasticity of the money demands derived from those previous works is necessarily 1 and 0 respectively

central bank misperceptions and the role of money in interest rate rules research with keynesian style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant critics however have argued that these models need to be modified to account for observed money growth and inflation trends and that monetary trends may serve as a useful cross check for monetary policy we identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation if interest rate prescriptions derived from keynesian style models are augmented with a cross check against money based estimates of trend inflation inflation control is improved substantially

simultaneous entry and welfare abstract i examine the welfare properties of free entry under conditions of simultaneous entry specifically i consider the second best problem of influencing the number of entrants while taking as given firm behavior upon entry i consider two alternative models of simultaneous entry grab the dollar entry and war of attrition entry i show that if entry costs are low then the results from previous models of sequential entry are fairly robust to the possibility of simultaneous entry if however entry costs are high then the welfare effects of free entry depend delicately on the nature of the entry game being played

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

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

monetary policy and the transaction role of money in the us the declining importance of money in transactions can explain the well known fact that u s interest rate policy was passive in the pre volcker period and active after 1982 we generalise a standard cashless new keynesian model woodford2003 by incorporating an explicit transaction role for money in the pre volcker period we estimate that money did play an important role and determinacy required a passive interest rate policy however after 1982 money no longer played an important role in facilitating transactions correspondingly the conventional view prevails and an active policy ensured equilibrium determinacy

measuring direct discrimination in labor markets using a frontier approach evidence from cps female earnings data numerous studies of earnings differentials have attempted to measure discrimination against females or minorities by decomposing the total differential between males and females or whites and non whites into an explained and unexplained portion typically these studies follow the work of oaxaca 8 however a number of criticisms can be raised with these techniques 9 5 4 of which two are particularly important that the reduced form wage equations for the two groups will not be identical in every case and that there may be large and unobservable differences between the characteristics of the two groups for which the wage equations cannot account either of these problems are sufficient to make it impossible to use residual analysis to measure discrimination attempts to address these problems and obtain reliable and consistent estimates of the extent of discrimination are important for policy purposes low and villegas 7 address the first of these problems by suggesting the use of hedonic wage equations which contain only human capital characteristics or proxies and characteristics which directly affect the hedonic parameters in this framework perfect substitution between the workers is assumed their work however leaves the second problem unresolved in this paper a stochastic earnings frontier with a discrimination discount is used to estimate discrimination against women an earnings frontier for females that depends upon marginal productivity as measured by human capital and labor market characteristics of females is estimated discrimination is assumed to be the amount female earnings are removed from the frontier less any labor market inefficiency since these estimates will depend solely on female data they do not depend upon an assumption of similarity between males and females this procedure allows

wage or price based inflation alternative targets in optimal monetary policy rules abstract in this paper the optimality of a specific variant of monetary policy rules a la taylor is tested within a general equilibrium monetary model with both nominal and real rigidities the traditional taylor rule is amended by the inclusion of the growth rate of nominal wage or wage inflation nominal rigidities are inserted via quadratic adjustment costs for both prices and wages a la rotemberg 1982 sticky prices in the united states journal of political economy 90 1187 1211 and kim 2000 constructing and estimating a realistic optimizing model of monetary policy journal of monetary economics 45 329 359 cost of capital adjustment together with a positive steady state inflation rate allow the model to match the main empirical facts about us economy the model is solved by using a second order approximation around the non stochastic steady state as in kim et al 2008 calculating and using second order accurate solutions of discrete time dynamic equilibrium models journal of economic dynamics and control 32 11 3397 3414 the welfare metric is offered by the second order expansion of the utility function conditional to the non stochastic steady state the results show that wage inflation targeting is welfare improving when coupled with inflation targeting moreover optimal monetary rules include also a positive coefficient for output targeting as the need to smooth out quantity adjustments induced by real and nominal rigidities similar results occurs when both targets are in expected value one period ahead the model shows good in sample and out of sample properties

admissible monetary aggregates for the euro area we use the fleissig and whitney fleissig a r whitney g a 2003 a new pc based test for varian s weak separability conditions journal of business and economics statistics 21 1 133 144 weak separability test to determine admissible levels of monetary aggregation for the euro area we find that the euro area monetary assets in m2 and m3 are weakly separable and construct admissible divisia monetary aggregates for these assets we show that real growth of the admissible divisia aggregates enters the euro area is curve positively and significantly for the period from 1980 to 2005 out of sample we show that divisia m2 and m3 appear to contain useful information for forecasting euro area inflation

changes in the federal reserve s inflation target causes and consequences this paper estimates a new keynesian model to draw inferences about the behavior of the federal reserve s unobserved inflation target the results indicate that the target rose from 1 1 4 percent in 1959 to over 8 percent in the mid to late 1970s before falling back below 2 1 2 percent in 2004 the results also provide some support for the hypothesis that over the entire postwar period federal reserve policy has systematically translated short run price pressures set off by supply side shocks into more persistent movements in inflation itself although considerable uncertainty remains about the true source of shifts in the inflation target jel e31 e32 e52

asymmetric equilibria in symmetric games with many players abstract we show that in symmetric games with many players an asymmetric pure strategy equilibrium can be thought of as the approximate outcome of the play of a specific symmetric mixed strategy equilibrium

a model of monetary policy shocks for financial crises and normal conditions in their classic 1999 paper monetary policy shocks what have we learned and to what end christiano eichenbaum and evans cee investigate one of the most widely used methods for identifying monetary policy shocks of its time unfortunately their approach is no longer viable at least not in its original form a major problem stems from the recent behavior of two key variables in their model the fed funds rate and non borrowed reserves we develop a new identification scheme that remedies these diculties but maintains the basic cee framework our empirical specification is motivated by a standard new keynesian dsge model augmented by a simple financial structure the model provides theoretical support for variables we use in place of certain variables that were used in the classic var approach outlined in cee one significant innovation is our use of divisia m4 the broadest monetary aggregate currently available for the united states as the policy indicator variable we obtain four major empirical results that support the use of a properly measured broad monetary aggregate as the policy variable first policy shocks have significant eects on output and on the price level even when an interest rate is included in our model contradicting the new keynesian argument that monetary aggregates are redundant second we develop a model that is not subject to the output price or liquidity puzzles common to this literature contradicting the view that using the interest rate as the policy indicator generally yields more reasonable responses than a monetary aggregate third during normal conditions policy shocks from our divisia based model have similar eects on variables to those found in the fed funds model of monetary policy and where there are dierences our model with divisia m4 obtains results that are more consistent with standard economic theory fourth our preferred specification produces plausible responses to a monetary policy shock in samples that include or exclude the recent financial crisis

uk wage underpayment implications for the minimum wage dynamic monopsony suggests that due to labour market frictions workers will be paid below their productivity this paper uses the stochastic frontier technique to estimate the degree of this underpayment for uk employees it finds evidence of significant underpayment the estimates are used to examine whether the predictions of dynamic monopsony are empirically accurate no conclusive evidence against this theoretical framework is found the paper also investigates whether payment according to productivity is a sufficient condition for the elimination of the working poor problem due to the existence of an unemployment barrier it finds that the minimum wage is not an effective anti poverty policy

employment and the introduction of a minimum wage in britain there has been and will continue to be a lot of controversy regarding the introduction of a minimum wage in britain much has been said about the economic effects of a minimum wage about the level at which it should or could be set about how other workers would be affected and about how a minimum wage may interact with the benefit system as the labour or liberal democrat parties will if they win the next election introduce a minimum wage it is evident that a clear and informed discussion of the economic effects is important most of the existing debate has concentrated on its impact on jobs and here the discussion varies from pure ideology to consideration of the statistical evidence the former is typified by the comments of a number of government ministers a recent example is that by ian lang the independent i3 september i995 who said that a minimum wage set at f4 i5 an hour would cost at least 950 000 jobs this comes from assuming large knock on effects from a minimum wage by asserting that the average worker would claim a pay increase of half the magnitude of the increase received by low paid workers when their pay is raised to the minimum and then that this wage increase has to transmit into job loss the qualitative prediction of job loss is of course entirely in line with orthodox models of the labour market which unambiguously predict that increases in minimum wages price workers out of jobs 1 it is also in line with the sentiments outlined in the recent oecd jobs study of i994 which stresses that minimum wages cause job loss in the member countries for example the jobs study argues that governments should ensure sufficient differentiation in wage rates by age and region to prevent the minimum wage from harming employment prospects for young people or low productivity regions oecd jobs study p 46 however a more recent body of work questions this conventional view quite a lot of empirical evidence has been accumulated in recent years that fails to find any evidence ofjob loss associated with minimum wages the emphasis seems to have shifted from how negative are the employment effects to is there an employment effect and in some circles what potential is there for a positive effect after a brief review of the history of minimum wages in britain we discuss this recent work in the next section of the paper on the

a new comparative approach to macroeconomic modeling and policy analysis in the aftermath of the global financial crisis the state of m acroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism macroeconomists in academia and policy institutions are blamed for relying too much on a particular class of macroeconomic models that did not sufficiently this paper propose s a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms macroeconomic model comparison projects have helped produce some very influenti al insights such as the taylor rule however they have been infrequent and costly because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings this paper provides a new comparative approach to model based research and policy analysis that enables individual researchers to conduct model comparisons easily frequently at low cost and on a large scale using this approach a model archive is built that incl udes many well known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies a computational platform is created that allows straightforward comparisons of models implications its application is illustrated by compa ring different monetary and fiscal policies across selected models researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development

unemployment fears and deflationary spirals the interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features in isolation dampen them during recessions fears of unemployment stir up precautionary sentiments which induces agents to save more the additional savings may be used as investments in both a productive asset equity and an unproductive asset money but even a small rise in money demand has important consequences the desire to hold money puts deflationary pressure on the economy which provided that nominal wages are sticky increases wage costs and reduces firm profits lower profits repress the desire to save in equity which increases the fear of unemployment and so on this is a powerful mechanism which causes the model to behave differently from both its complete markets version and a version with incomplete markets but without aggregate uncertainty in contrast to previous results in the literature agents uniformly prefer non trivial levels of unemployment insurance

underpaid and overworked measuring the effect of imperfect information on wages this paper investigates the degree of shortfall between the wages workers earn and what they could earn assuming perfect or costless information in the labor market we use the stochastic frontier regression technique to estimate the degree of shortfall found in wages on an individual basis the paper tests in addition a number of hypotheses supplied by search theory in this context the results generally confirm the propositions from search theory and indicate that on the average worker wages fall short of worker potential wages by approximately 10 percent

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

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

real balance effects and monetary policy i introduction modern literature on monetary policy rules employs new keynesian optimizing models that do not explicitly include monetary aggregates see e g rotemberg and woodford 1997 clarida et al 1999 taylor 1999 in these models the demand for output derives from the log linearization of the standard euler equation characterizing household s saving decisions the real money stock does not enter the is relation and therefore monetary policy affects output and inflation only through its effect on the real interest rate when the nominal interest rate is the policy instrument it is not necessary to specify a money market equilibrium condition see romer 2000 the practice of neglecting monetary aggregates in monetary policy analysis has recently been questioned by meltzer 1999 mccallum 2001 and nelson 2002 2003 in particular mccallum 2001 points out that although no explicit term involving money appears in the standard new keynesian setup long run inflation can still be pinned down by the economy steady state nominal money growth rate moreover mccallum 2000 2001 andres et al 2001 kremer et al 2003 woodford 2003 ireland 2004a and collard and dellas 2005 analyze the case in which the resources used by consumers in conducting transactions are modeled by a nonseparable function of consumption and real money balances meltzer 1999 2001 argues that changes in real monetary base generate effects on real aggregate demand not summarized by the real interest rate on short term securities nelson 2003 emphasizes the role of money in the transmission mechanism both as a proxy for a whole spectrum of rates of return and as an indicator variable which contains information about the state of the economy the main aim of the present article is to provide additional microfoundations for an explicit role for money in the current macroeconomic debate in particular i derive a real balance effect that explicitly enters the is relation within an optimizing general equilibrium framework of the new keynesian type according to de scitovszky 1941 haberler 1946 pigou 1943 and patinkin 1965 a change in real money balances has an impact on the real financial wealth of consumers and therefore affects consumption and output notably this effect is not considered in traditional models there is in fact empirical evidence showing that real monetary base growth is a significant determinant of consumption and output gap in both the united states and in the united kingdom see chari et al 1995 meltzer 1999 nelson 2002 the present article extends the dynamic stochastic new keynesian setup with money in the utility function by introducing overlapping generations as modeled by yaari 1965 and blanchard 1985 there are good reasons to base the demand side of the economy on a discrete time stochastic monetary version of the yaari blanchard model first this kind of extension allows one to maintain the main characteristics of the so called new neoclassical synthesis that is forward looking behavior of optimizing agents and incomplete nominal adjustment of prices featured in new keynesian theories goodfriend and king 1997 second the derivation of the real balance effect does not require nonseparability in the utility function thus the implications are analytically more tractable 1 third my framework is more general because it includes the immortal representative agent setup as a particular case my analysis attempts to examine whether the presence of an explicit real balance effect in the is relation helps evaluate the role for money in designing monetary policy rules i focus on basic issues concerning the design of monetary policy rules specifically i investigate whether it is necessary for monetary policy to overreact to inflation by raising the nominal interest rate by more than the observed increase in inflation to rule out equilibrium multiplicity

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

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

money and information in a new neoclassical synthesis framework we consider an otherwise standard new neoclassical synthesis theoretical framework that allows a role for money money in our model has an informational role which facilitates the estimation of the unobserved shocks that drive potential output and thus the state of the economy for this purpose we estimate a small scale sticky price model using bayesian techniques our findings support the view that money has information value this is reflected in higher precision in terms of unobserved model concepts such as the natural rate of output moreover our results highlight how modelling money demand can provide insights about structural features of the economy that may be important for the design of interest rate rules focusing on money also allows for a step towards resolving the price puzzle money demand shocks can confound monetary policy shocks to generate a perverse price response in vector autoregressions var

monetary and fiscal policy interactions in a micro founded model of a monetary union abstract this paper analyzes in detail the mechanisms behind fiscal stabilization policy and the role of policy commitment in a micro founded new keynesian model of a two country monetary union which is hit by supply shocks we also explore the determinants of the gains from fiscal stabilization while monetary policy with identical union members is concerned with stabilizing the union wide economy fiscal policy aims at stabilizing inflation differences and the terms of trade besides exploring optimal policies we also consider monetary and fiscal rules we study these rules both under coordination and non coordination by the fiscal authorities

technology shocks and aggregate fluctuations in an estimated hybrid rbc model this paper contributes to the on going empirical debate regarding the role of the rbc model and in particular of technology shocks in explaining aggregate fluctuations to this end we estimate the model s posterior density using markov chain monte carlo mcmc methods within this framework we extend ireland s 2001 2004 hybrid estimation approach to allow for a vector autoregressive moving average varma process to describe the movements and co movements of the model s errors not explained by the basic rbc model the results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model s fit relative to the var and ar alternatives moreover despite setting the rbc model a more difficult task under the varma specification our analysis based on forecast error and spectral decompositions suggests that the rbc model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post war u s economy

money s role in the monetary business cycle a small structural model of the monetary business cycle implies that real money balances enter into a correctly specified forward looking is curve if and only if they enter into a correctly specified forward looking phillips curve the model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation maximum likelihood estimates of the modelos parameters take both these considerations into account but still suggest that money plays a minimal role in the monetary business cycle

cheap talk coordination and entry we show how costless nonbinding nonverifiable communication cheap talk can achieve partial coordination among potential entrants into a natural monopoly industry where the payoffs are qualitatively like the battle of the sexes the analysis would apply equally in other economic situations with such payoffs for example bargaining under complete information or choosing compatibility standards while cheap talk helps achieve asymmetric coordination in a symmetric mixed strategy equilibrium it cannot achieve complete coordination if the game involves even a small amount of conflict

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

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 future of monetary aggregates in monetary policy analysis this paper considers the role of monetary aggregates in modern macroeconomic models of the new keynesian type the focus is on possible developments of these models that are suggested by the monetarist literature and that in addition seem justified empirically both the relation between money and inflation and between money and aggregate demand are considered regarding the first relation it is argued that both the mean and the dynamics of inflation in present day models are governed by money growth this relationship arises from a conventional aggregate demand channel claims that an emphasis on the link between monetary aggregates and inflation requires a direct channel connecting money and inflation are wide of the mark the relevance of money for aggregate demand in turn lies not via real balance effects or any other justification for money in the is equation but on money s ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand this role for monetary aggregates which is supported by empirical evidence enhances the value of money to monetary policy

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

estimating the evolution of money s role in the u s monetary business cycle we assess money s role in the post wwii u s business cycle by employing both fixed coefficient and rolling window bayesian estimations of a structural model of the business cycle with money our empirical evidence favors a specification with drifting parameters for money consumption nonseparability and the federal reserve s reaction to nominal money growth the role of money is estimated to have been important during the 1970s and declined afterward the omission of money produces severely distorted impulse response functions relative to the model with money money is found to be important in replicating the u s output volatility during the great inflation

why money growth determines inflation in the long run answering the woodford critique woodford 2007 argues that it is not appropriate to regard inflation in the steady state of new keynesian models as determined by steady state money growth woodford instead argues that the intercept term in the monetary authority s interest rate policy rule determines steady state inflation in this paper i offer an alternative interpretation of steady state behavior according to which it is appropriate to regard steady state inflation as determined by steady state money growth the argument relies on traditional interpretations of the central bank s power in the long run and appeals to model properties that are common to textbook and new keynesian analysis according to this argument the only way the central bank can control interest rates in the long run is via affecting inflation and its only means available for determining inflation is by determining the money growth rate

solving the price puzzle with an alternative indicator of monetary policy we identify the effects of monetary policy shocks on macroeconomic variables in vars using the divisia m4 measure of money as the policy indicator variable we obtain theoretically sensible responses whether or not a commodity price index is included thus we eliminate the well known empirical puzzles from the var by a novel choice in a policy variable rather than the usual attachment of an ad hoc variable

when does the cost channel pose a challenge to inflation targeting central banks abstract in a sticky price model where firms finance their production inputs there is both a lower and an upper bound on the central bank s inflation response necessary to rule out the possibility of self fulfilling inflation expectations this paper shows that real wage rigidities decrease this upper bound but coefficients in the range of those on the taylor rule place the economy well within the determinacy region however when there is time variation in the share of firms who finance their inputs i e markov switching then inflation targeting interest rate rules frequently result in indeterminacy even if the central bank also targets output adding a nominal growth target to the policy rule can often alleviate this indeterminacy and therefore anchor inflation expectations

on the job search some empirical evidence from britain abstract this paper considers evidence from the labour force survey concerning job search by employed workers the unconditional probability of observing on the job search is decomposed into the product of two constituent probabilities upon which maximum likelihood estimation is performed the analysis facilitates the identification of who searches and whether search takes place in work or from unemployment temporary or part time employment encourages continued search by men but not women skilled workers search more than the unskilled and demonstrate a preference for employed search inter industry wage relativities encourage search on the job job tenure is a significant determinant of the quality of a job match and the subsequent likelihood that on the job search is undertaken employed job seekers adopt search strategies that are more readily integrated into a working environment

does money matter for the identification of monetary policy shocks a dsge perspective this paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard dsge model considering svar models in which either the interest rate is predetermined for money or money and the interest rate are simultaneously determined two dsge models are estimated by minimum distance estimation the estimation results reveal that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption in addition the estimated monetary policy rule is sensitive to the identification scheme this suggests that the way money is introduced in the identification scheme is not neutral for the estimation of dsge models c 2010 elsevier b v all rights reserved

money in the production function a new keynesian dsge perspective this article checks whether money is an omitted variable in the production process by proposing a microfounded new keynesian dynamic stochastic general equilibrium model in this framework real money balances enter the production function and money demanded by households is differentiated from that demanded by firms using a bayesian analysis our model weakens the hypothesis that money is a factor of production however the demand of money by firms appears to have a significant impact on the economy even if this demand has a low weight in the production process

functional monetary aggregates monetary policy and business cycles abstract in this paper we take the economic approach to monetary aggregation in the context of highly disaggregated demand systems encompassing the full range of monetary assets in the united states we estimate the effectively globally regular minflex laurent ml and normalized quadratic nq flexible functional forms we produce the ml and nq functional monetary aggregates consistent with neoclassical microeconomic theory also addressing the issue of optimal monetary aggregation we highlight the influence of measurement on statistical inference by investigating whether the ml and nq functional monetary aggregates are of importance in resolving paradoxes associated with the measurement of money in doing so we also provide a comparison between the functional monetary aggregates and the fed s broad sum m2 aggregate and the center for financial stability broad divisia m3 and divisia m4 aggregates our detailed statistical analysis favors the functional monetary aggregates

how sticky is sticky enough a distributional and impulse response analysis of new keynesian dsge models in this paper we add to the literature on the assessment of how well data simulated from new keynesian dynamic stochastic general equilibrium dsge models reproduce the dynamic features of historical data in particular we evaluate sticky price sticky price with dynamic indexation and sticky information models using impulse response and correlation measures and via implementation of a distribution based approach for comparing possibly misspecified dsge models using simulated and historical inflation and output gap data one of our main findings is that for a standard level of stickiness i e annual price or information adjustment the sticky price model with indexation dominates other models we also find that when a lower level of information and price stickiness is used i e bi annual adjustment there is much less to choose between the models see bils and klenow 2004 for evidence in favor of lower levels of stickiness this finding is due to the fact that simulated and historical densities are much closer under bi annual adjustment

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

tax distortions and the case for price stability abstract we investigate the case for price stability in the general version of the new keynesian nns model with capital and several shocks the model includes in addition to the standard imperfect competition and monetary frictions a non trivial endogenous tax distortion we find that the case for perfect price stability is not significantly weakened optimal policy tolerates a small amount of output gap and price variability by reacting less strongly to supply and fiscal shocks in comparison to a policy that aims at perfect price stabilization