optimal monetary policy in an economy with inflation persistence abstract this paper studies optimal monetary policy in a model where inflation is persistent two types of price setters are assumed to exist one acts rationally given calvo type constraints on price setting the other type sets prices according to a rule of thumb this results in a phillips curve with both a forward looking term and a backward looking term the phillips curve nests a standard purely forward looking phillips curve as well as a standard purely backward looking phillips curve as special cases a cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic a central bank loss function for this model is derived from a second order taylor approximation of the household s welfare function optimal monetary policy for different relative values of the forward and backward looking terms is then analyzed for both the commitment case and the case of discretion

the persistence of inflation versus that of real marginal cost in the new keynesian model this note provides an example where the new keynesian phillips curve leads inflation to be substantially more persistent than the output gap

global dynamics in a model with search and matching in labor and capital markets abstract in this paper global macroeconomic dynamics are studied when search frictions are present in both labor and capital markets on the basis of the merz 1995 macroeconomic model with labor market frictions and capital accumulation our paper offers an extension to frictions in capital markets analogously modeled as a search and matching process using the merz model as limit case we consider exogenous as well as endogenous borrowing constraints we also allow the cost of issuing bonds to change endogenously as we show capital market frictions exacerbate and accentuate the interaction between the two markets and magnify the effects of shocks on output consumption employment and welfare this interaction of the frictions in labor and capital markets are also shown to give rise to multiple equilibria on the basis of numerical solution techniques instead of relying on first or second order approximations around a unique steady state our paper uses dynamic programming techniques to compute decision variables and the value function directly and assess the local and global dynamics of the model the steady state solutions are studied by using the hamiltonian and the dynamics are assessed for various model variants by using dynamic programming techniques

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

entry of firms and cost of disinflation in new keynesian models introducing costs of entry in the product market into a new keynesian model with calvo type price setting and non zero steady state inflation is a means to restore output costs of disinflation in the short run before output gains in the long run

the time varying nairu and its implications for economic policy the nairu the unemployment rate consistent with a constant rate of inflation is estimated in this paper as a parameter allowed to vary over time value is determined in an econometric model where the inflation rate depends on its past values demand and supply shocks the nairu estimated for the gdp deflator varies over the past forty years within 5 4 to 6 5 percent its estimated value for the most recent quarter 1996 q2 is 5 6 percent the nairu has declined in recent years in response to global competition immigration other factors weakening labor s bargaining position and the rapidly declining prices of computers and other electronics

lack of divine coincidence in new keynesian models abstract the literature has long agreed that the divine coincidence holds in standard new keynesian models the monetary authority is able to simultaneously stabilize inflation and output gap in response to preference and technology shocks i show that the divine coincidence holds only when inflation is stabilized at exactly zero even small deviations from zero generate policy trade offs i demonstrate this result using the model s non linear equilibrium conditions to avoid biases from log linearization when the model is log linearized a non zero steady state level of inflation gives rise to what i call the endogenous trend inflation cost push shock in the new keynesian phillips curve

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

we like to see you in the gym a field experiment on financial incentives for short and long term gym attendance abstract this paper presents a field experiment to analyze whether financial incentives conditional on attending the gym can increase gym attendance of members of an off campus gym both in the short run two quarters of a year and in the long run the next two quarters of the year the incentivized subjects received a rebate of approximately 10 of the average membership fee conditional on attending the gym at least once per week in 11 of the 13 weeks of the first quarter of 2010 in the second quarter of 2010 the incentive was repeated allowing subjects a second chance to earn a rebate in both quarters they received a rebate of 25 instead of 15 conditional on attending the gym at least twice a week in 11 of the 13 weeks gym attendance was recorded both during the intervention period and during the two quarters after we compared the conditional incentive to attend the gym with an unconditional incentive where subjects would receive the 10 rebate per quarter merely for staying a member of the gym the conditional incentive to attend the gym had a positive yet non persistent impact on gym attendance we conclude that gym attendance can be improved through incentives but that smarter non financial incentives and nudges need to be explored as well to obtain more persistent improvements in gym attendance

a macro micro analysis of the effects of electricity reform in senegal on poverty and distribution abstract this paper uses a computable general equilibrium cge macro micro model to explore the distributional effects of price reform in the electricity sector of senegal in the first part of the paper we analyse the distribution of electricity in senegal by income quintiles between 1995 and 2001 the analysis demonstrates that poor and rural households are not the main beneficiaries of the expanded network the results of the cge model show that direct price effects are weaker than general equilibrium effects on poverty and inequality moreover compensatory policies tested can help attenuate some adverse effects

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

optimal monetary policy with international trade in intermediate inputs abstract this paper examines optimal monetary policy in a two country new keynesian model with international trade in intermediate inputs we derive the loss function of a cooperative monetary policymaker and find that the optimal monetary policy must target intermediate goods price inflation rates final goods price inflation rates final goods output gaps and relative price gaps we use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three taylor type monetary policy rules a main finding is that the degree of price stickiness at the stage of intermediate goods production is a key factor to determine which policy rule should be followed specifically when the degree of price stickiness at the stage of intermediate goods production is high the policymaker should follow intermediate goods ppi based taylor rule whereas cpi based taylor rule should be followed when the degree of price stickiness at the stage of intermediate goods production is intermediate or low

imperfect competition and the effects of energy price increases on economic activity the authors show that modifying the standard neoclassical growth model by assuming that competition is imperfect makes it easier to explain the size of the declines in output and real wages that follow increases in the price of oil plausibly parameterized models of this type are able to mimic the response of output and real wages in the united states the responses are particularly consistent with a model of implicit collusion where markups depend positively on the ratio of the expected present value of future profits to the current level of output copyright 1996 by ohio state university press

on the benefits of a monetary union does it pay to be bigger this paper revisits the question of the appropriate domain of a currency area using a new keynesian open economy model in which the world is split into two areas each framed as a continuum of small open regions we show that the adoption of a common currency like the euro can be beneficial for the members of the monetary union since the spill over effects generated by the inflationary policies of the small open economies are likely to outweigh the costs of not tailoring monetary policy to country specific shocks we also show that while the enlargement of the monetary union to another group of small open economies can bring about welfare gains for all countries involved monetary integration of two large economies such as the euro area and the u s will not these findings can help to rationalize the process of the creation and enlargement of multi country currency areas like the eurozone

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

wage dynamics reconciling theory and evidence u s macroeconomic evidence shows a negative relation between the rate of change of wages and unemployment in contrast most theories of wage determination imply a negative relation between the level of wages and unemployment in this paper we ask whether one can reconcile the empirical evidence with theoretical wage relations we reach three main conclusions first we derive the condition under which the two can indeed be reconciled we show the constraints that such a condition imposes on the determinants of workers reservation wages as well as the relative importance of workers outside options as opposed to match specific productivity in wage determination second in the light of this condition we reinterpret the presence of an error correction term in macroeconomic wage relations for most european economies but not in the united states third we show that whether this condition holds or not has important implications for the effects of a number of variables from real interest rates to oil prices to payroll taxes on the natural rate of unemployment this abstract was borrowed from another version of this item

sticker shocks using vat changes to estimate upper level elasticities of substitution we estimate the upper level elasticity of substitution between goods and services of a nested aggregate ces preference specification we show how this elasticity can be derived from the long run response of the relative price of a good to a change in its vat rate we estimate this elasticity using new data on changes in vat rates across 74 goods and services for 25 european union countries from 1996 through 2015 depending on the level of aggregation we find a vat pass through rate between 0 4 and 0 7 this implies an upper level elasticity of 3 at the lowest level of aggregation with 74 categories and 1 cobb douglas preferences at a high level of aggregation that distinguishes 10 categories of goods and services

services inflation dynamics and persistence puzzle in brazil a time varying parameter approach this article analyses services inflation dynamics in brazil focusing on the services inflation persistence puzzle for monthly data from january 2004 to february 2016 we apply a time varying para

real wage rigidity and the taylor principle abstract this paper investigates conditions for equilibrium determinacy in the basic new keynesian model with real wage rigidity the determinacy region is increased under forward looking rules and the taylor principle continues to ensure equilibrium uniqueness under current looking rules

how strong is the macroeconomic case for downward real wage rigidity we explore the existence of downward real wage rigidity drwr at the industry level based on data from 19 oecd countries for the period 1973 1999 the results show that drwr compresses the distributions of industry wage changes overall as well as for specific geographical regions and time periods but there are not many real wage cuts that are prevented more important however drwr attenuates larger real wage cuts thus leading to higher real wages there is stronger evidence for downward nominal wage rigidity than for drwr real wage cuts are less prevalent in countries with strict employment protection legislation and high union density

monetary and fiscal policy in the great moderation and the great recession in this paper we argue for a new approach to monetary and fiscal policy during the great moderation the inflation targeting regime worked well central banks used the interest rate to stabilize inflation and subject to inflation being controlled stabilized the level of demand fiscal policy exerted discipline over the public sector deficits thereby indirectly managing the level of public debt such fiscal housekeeping worked well because the monetary authorities were stabilizing the economy but once private sector deleveraging led to the great recession and interest rates hit their zero bound the outcome could no longer be managed by monetary policy recovery depended on the automatic stabilizers output and tax revenues have fallen public debt has been created and assets have been created which a deleveraging private sector wishes to hold but the effect has been very gradual recovery would have been faster if fiscal policy had been responsible for the restoration of full employment in an environment which tolerated the necessary rises in public debt conversely policies of austerity designed to reduce public debt have slowed the recovery growth will not be resumed until the private sector begins to invest strongly again creating the financial assets which the private sector wishes to hold thereby enabling public debt to be retired this has not yet happened because the private sector correctly does not believe that macroeconomic policy is capable of sustaining a strong recovery