the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

second best carbon taxation in the global economy the green paradox and carbon leakage revisited acceleration of global warming resulting from a future carbon tax is large if the price elasticities of oil demand are large and that of oil supply is small the fall in the world interest rate weakens this weak green paradox effect especially if intertemporal substitution is weak still social damages from greenhouse gases drop if the fall in oil supply and cumulative emissions is strong enough if the current carbon tax is set too low the second best future carbon tax is set below the first best too to mitigate adverse green paradox effects unilateral second best optimal carbon taxes exceed the first best taxes due to an import tariff component the intertemporal terms of trade effects of the future carbon tax increase current and future tariffs and those of the current tax lower the current tariff finally carbon leakage and globally altruistic and unilateral second best optimal carbon taxes if non kyoto oil importers price carbon too low are analysed in a three country model of the global economy

testing heterogeneity within the euro area this note estimates several constrained versions of an optimization based multi country model to test the sources of heterogeneity within the euro area we show that the main source is the asymmetry of shocks affecting the economies and that the heterogeneity of behaviors does not seem to be of empirical relevance for the euro area

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

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

differences in interest rate policy at the ecb and the fed an investigation with a medium scale dsge model using two estimated models for the euro area and the united states this paper investigates whether the observed dierence in the amplitude of the interest rate cycle since 1999 in both areas is due to dierences in the estimated monetary policy reaction function dierences in the structure of the economy or dierences in the size and nature of the shocks hitting both economies the paper concludes that dierences in the type size and persistence of shocks in both areas can largely explain the dierent interest rate setting

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

equilibrium unemployment job flows and inflation dynamics this paper develops a general equilibrium model to explain a set of facts regarding job flows unemployment and inflation dynamics it integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities the labor market displays matching frictions and endogenous job destruction the model can explain the cyclical behavior of unemployment job creation job destruction and the joint fluctuations of the labor input along both the extensive and the intensive margin conditional on a shock to monetary policy allowing for variation of the labor input at the extensive margin leads to a significantly lower elasticity of marginal costs with respect to output this helps to explain the sluggishness of inflation and the persistence of output after a monetary policy shock

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

estimated general equilibrium models for the evaluation of monetary policy in the us and europe a persistent criticism of general equilibrium models of monetary policy which incorporate nominal inertia in the form of the new keynesian phillips curve nkpc is that they fail to capture the extent of inflation inertia in the data in this paper we derive a general equilibrium model based on optimising behaviour but which also implies a data consistent nkpc specifically our model accounts for nominal inertia in both price and wage setting as well for habits in consumption using us and european data from 1970 to 1998 our parameter estimates reveal that i there is relatively more inertia in price setting in europe ii wage contracts last longer in the us iii the extent of backward looking behaviour in price and wage setting is statistically significant but small in both the us and europe and iv significant habits effects are present in european consumption finally we simulate the effects of monetary policy and find that while the magnitude of the impact of monetary policy on the endogenous variables in our estimated models are similar to other econometric studies the dynamic paths for variables display less inertia than is typically found in studies which use output gaps to proxy changes in marginal costs

should a monetary policymaker look at money abstract this paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policymaker has incomplete information about the environment we find that money does not contain useful information for the policymaker if we calibrate the model to the u s economy if money demand were to be appreciably less variable observations on money could be useful in response to productivity shocks but would be harmful in response to money demand shocks we provide an incomplete information example where equilibrium welfare declines when the money demand volatility decreases

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

carbon motivated border tax adjustments old wine in green bottles 1285 ben lockwood and john whalley we discuss emerging proposals for border tax adjustments btas to accompany commitments to reduce carbon emissions in the eu the us and other oecd economies the rationale offered for such border adjustment is that various entities such as the eu if making commitments to reduce emissions which go beyond those undertaken in other regions of the world impose added costs on domestic producers which create a competitive disadvantage for them some form of remedy is viewed as reasonable to maintain the competitiveness of domestic industries when responding to global environmental problems in this paper we argue that despite its current carbon manifestation the issue of border tax adjustments and both their rationale and their effects on trade are not new and despite the present debate which seems to overlook older literature have arisen before earlier debate on border tax adjustments occurred at the time of the adoption of the value added tax vat in the eu as a tax harmonisation target in the early 1960s but academic literature of the time showed that a change between origin and destination basis in the vat would be neutral and hence the use of a destination based tax in the eu to accompany the vat offered no trade advantage to europe here we argue that essentially the same arguments also apply for carbon motivated btas and in the current debate there seems to be a misconception between price level effects and relative price effects stemming from a bta which needs correcting we also argue that the impact of border tax adjustments should be viewed as independent of the motivation of the adjustments

rent extracting tariffs and the management of exhaustible resources this paper examines the interaction between a resource exporting and a resource importing country the exporting country must choose the optimal rate of depletion of an exhaustible resource and also must decide on the allocation of the extracted resource between exports and domestic use optimal management from a national point of view entails inefficiency from a global perspective in that too little resource is exported as the supplying country exploits its monopoly power the importing country however has an incentive to extract some of the resource rent by using a tariff although rent extraction is limited by the exporter s ability to use the resource domestically the optimal tariff is positive and induces greater overall inefficiency

on capturing oil rents with a national excise tax this paper argues that since the supply of oil in the ground is inelastic the incidence of a sales tax on oil maintained forever at a fixed rate would fall entirely on the oil suppliers in the world economy however the elasticity of supply of oil to a single country depends on that country s imports as a share of world output and on the elasticity of demand for that country the paper calculates optimal tax rates for a country as a function of these variables and estimates optimal oil tax rates for the u s for some oecd countries separately and for the u s plus the oecd collectively current u s tax rates are shown to be far below optimal values

fleshing out the monetary transmission mechanism output composition and the role of financial frictions financial frictions affect the way in which different macroeconomic series respond to a monetary policy shock we embed the financial accelerator of bernanke gertler and gilchrist 1999 into a medium scale dsge model and evaluate the relative importance of financial frictions in explaining monetary transmission specifically we apply minimum distance estimation based on impulse responses for the volcker greenspan period apart from providing estimates for structural parameters our procedure lends itself for specification tests that can be used to assess the relative fit of various restricted models financial frictions turn out to be of lesser importance for the descriptive success of our model

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

monetary policy shocks and financial conditions a monte carlo experiment abstract the effects of monetary policy shocks on financial conditions are often estimated by appealing to recursive vector autoregressions vars we assess the ability of this class of vars to recover the true effects of a monetary policy shock via a monte carlo experiment in which the data generating process is a dynamic stochastic general equilibrium dsge model featuring macro finance interactions and estimated with u s quarterly data our dsge model predicts a negative and significant reaction of financial conditions to an unexpected monetary policy tightening we point out that such reaction is just overlooked by recursive vars moreover we show that cholesky vars may substantially underestimate the welfare costs due to macroeconomic fluctuations

estimation and control of an optimization based model with sticky prices and wages abstract this paper provides estimates of an optimization based equilibrium model with sticky prices and wages the estimated model is used to analyse the welfare properties of various interest rate rules for conducting monetary policy an important feature of this model is that it involves a tradeoff between the variances of price and wage inflation and the output gap this tradeoff implies that it is desirable for the monetary authority to respond to wage inflation in addition to price inflation output and past interest rates when setting the current interest rate the issue whether wages and prices can be indexed to steady state inflation has important implications both for the characterization of optimal interest rate rules and interest rate volatility in particular optimal policy in the presence of indexation induces implausibly high steady state inflation

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

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

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

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

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

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

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

a new look at pass through abstract this paper examines the relationship between exchange rates and prices rather than assuming exchange rate changes are exogenous shocks that affect prices i use a long run restrictions var to identify shocks and explore the way domestic prices import prices and exchange rates react to a variety of shocks consumer price pass through is nearly complete in response to some shocks but low in response to others alternatively import prices and exchange rates typically respond in the same direction and pass through seems quick this supports the idea that import prices are set in the producer s currency and that lower cpi pass through is a result of changes in quantities or margins further down the supply chain

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

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

unilateral climate policies incentives and effects we analyze the effect of climate policies using a two region partial equilibrium model of resource extraction the regions are heterogeneous in various aspects such as in their climate policies and resource extraction costs we obtain analytical and numerical conditions for a green paradox to occur as a consequence of a unilateral increase in carbon taxation and backstop subsidy in order to assess the welfare and climate consequences of unilateral policy changes we calibrate the model to real world parameter values we find that forming a climate coalition and introducing carbon taxation even in the absence of real climate concerns is the best course of action for the largest fossil fuel using regions

the exploitation of fossil fuels under the threat of global warming and carbon taxes a dynamic game approach this paper considers efficient and monopolistic extraction of non renewable energy resources when the resource consumption leads simultaneously to a stock externality global warming the case of monopolistic supply leads to a dynamic game between cartelised producers and a consumers government for this game we compute linear markov perfect strategies that are characterized by preemption of the tax at the wellhead when compared with the open loop solution unfortunately the general asymmetric two state variable model does not allow for an explicit analytical solution therefore a simplified version with one state variable neglecting depreciation of the stock of the pollutant is studied and a numerical example is presented it turns out that the simplified and analytically solved framework provides a good approximation of the initial phase of the transient behaviour but not of the long run