new perspectives on capital sticky prices and the taylor principle abstract our main result is that dynamic new keynesian dnk models with firm specific capital feature a substantial amount of endogenous price stickiness we use this insight to assess the desirability of alternative interest rate rules and make the case for combining active monetary policy with interest rate smoothing and or some responsiveness of the nominal interest rate to real economic activity the key mechanism behind our results is also useful from a positive point of view the feature of firm specific capital increases the empirical appealingness of dnk models as documented by a growing body of literature

investment and interest rate policy abstract the paper s theorems reverse two standard results of new keynesian economics simply by appending endogenous investment to a benchmark imperfect competition sticky price model our results are a a passive interest rate rule where the monetary authority responds to inflation by lowering the real interest rate implies local equilibrium uniqueness whereas an active rule does not generate a locally unique equilibrium b a temporary exogenous increase in the nominal interest rate causes a temporary increase in output and investment extensions of the benchmark model including generalized preferences and alternative interest rate rules are also examined journal of economic literature classification numbers e12 e31 e52

the taylor principle in a medium scale macroeconomic model abstract we consider a medium scale new keynesian model which combines features that have been shown to explain fairly well postwar u s business cycles our main result demonstrates that the determinacy properties of forward looking interest rate rules resemble at least qualitatively the corresponding outcomes under current looking rules we explain how and why the empiri cally relevant features of our model generate this novel result

weak disposability in nonparametric production analysis reply to fare and grosskopf fare and grosskopf this issue claim that a single abatement factor suffices for modeling weak disposability in nonparametric production models and that the kuosmanen 2005 technology that uses multiple abatement factors is larger than necessary this article demonstrates by a numerical example that a single abatement factor does not suffice to capture all feasible production plans and that its use leads to the violation of convexity one of the maintained assumptions of the model we also prove that the kuosmanen technology is the correct minimum extrapolation technology under the stated axioms

capital accumulation sectoral heterogeneity and the taylor principle abstract in the presence of capital accumulation the taylor principle may not be sufficient for determinacy under reasonable parameter values in this paper i consider a two sector extension of the models used in the existing literature i show that what matters for whether the taylor principle is sufficient is the price stickiness of investment goods price stickiness of consumer goods on the other hand matters very little the taylor principle is sufficient i find unless there is considerable price stickiness in the investment goods sector

taxation and the taylor principle a nominal tax system is added to a sticky price monetary business cycle model when nominal interest income is taxed the coefficient on inflation in a taylor type monetary policy rule must be significantly larger than one in order for the model economy to have a determinate rational expectations equilibrium when effective tax rates are raised by inflation the stability of the economy s equilibrium can be adversely affected finally when depreciation is treated as a charge against taxable income an even larger weight on inflation is required in the taylor rule in order to obtain a determinate and stable equilibrium

capital markets and the exchange rate with special reference to the dollarization debate in latin america the paper reviews the main challenges faced by policymakers in emerging market economies em in light of recent financial crises and taking into account salient factors like the existence of partial dollarization imperfect credibility weak financial systems and contagion the standard theory of optimal currency areas is discussed and criticized for omitting the above factors when these factors are taken into account an extreme foreign exchange regime like dollarization is shown to become much more attractive the paper discusses the pros and cons of dollarization and among other things shows that the lack of a lender of last resort is not necessarily a major drawback in em the paper also discusses inflation targeting it in a formal model it is shown that it could be subject to credibility problems similar to those found in exchange rate based stabilization programs

the taylor principle fights back part ii abstract the existing literature holds that the taylor principle often leads to indeterminacy in new keynesian models that allow for capital accumulation and limited asset market participation this conclusion is special however to the case of continuous full employment when the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously determinacy is the norm the threat of indeterminacy is limited to a tiny irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast everywhere else the taylor principle guarantees a unique rational expectations equilibrium the dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market

asean income gap and the optimal exchange rate regime this article investigates the optimal exchange rate regime in a group of asean countries which minimizes the adverse effects of foreign demand shocks on real output the real exchange rate price

some models for estimating technical and scale inefficiencies in data envelopment analysis in management contexts mathematical programming is usually used to evaluate a collection of possible alternative courses of action en route to selecting one which is best in this capacity mathematical programming serves as a planning aid to management data envelopment analysis reverses this role and employs mathematical programming to obtain ex post facto evaluations of the relative efficiency of management accomplishments however they may have been planned or executed mathematical programming is thereby extended for use as a tool for control and evaluation of past accomplishments as well as a tool to aid in planning future activities the ccr ratio form introduced by charnes cooper and rhodes as part of their data envelopment analysis approach comprehends both technical and scale inefficiencies via the optimal value of the ratio form as obtained directly from the data without requiring a priori specification of weights and or explicit delineation of assumed functional forms of relations between inputs and outputs a separation into technical and scale efficiencies is accomplished by the methods developed in this paper without altering the latter conditions for use of dea directly on observational data technical inefficiencies are identified with failures to achieve best possible output levels and or usage of excessive amounts of inputs methods for identifying and correcting the magnitudes of these inefficiencies as supplied in prior work are illustrated in the present paper a new separate variable is introduced which makes it possible to determine whether operations were conducted in regions of increasing constant or decreasing returns to scale in multiple input and multiple output situations the results are discussed and related not only to classical single output economics but also to more modern versions of economics which are identified with contestable market theories

government spending and the taylor principle this paper explores how government size affects the scope for equilibrium indeterminacy in a new keynesian economy where part of the population live hand to mouth the main result is that a higher level of public consumption is likely to generate indeterminacy and render the taylor principle insufficient as criterion for equilibrium uniqueness this holds even though fiscal policy serves to reduce swings in current income only if government consumption is a substitute for private consumption will it narrow the scope for indeterminacy hence monetary policy should be conducted with an eye to the amount and composition of government consumption

a note on dual foreign exchange markets with official rationing predetermined versus floating official exchange rate abstract this paper examines the relationship between the long run rate of inflation and the allocation of transactions between markets in economies that operate dual exchange market regimes and ration foreign exchange in the official market it shows that wider access of importers to the official market and wider access of exporters to the free market are associated with higher rates of inflation and vice versa the direction of causality among the various variables and thus the effects of economic policies depend on whether the official exchange rate is predetermined or floating

optimal wage re negotiation in a closed and open economy abstract this paper investigates an economy in which there are short term wage contracts that are re negotiated under certain conditions the paper determines the optimal frequency of wage re negotiation and shows that it depends positively on measures of aggregate variability and phillips curve slope the role of optimal wage re negotiation is to mitigate the output effects of various shocks in the context of an open economy it is shown that the desirable exchange rate regime in an economy with optimal wage re negotiation depends on the stochastic structure of the economy

citizen coproduction and efficient public good provision theory and evidence from local public libraries abstract in both public administration and economics efficiency is brought forward as an important criterion for evaluating administrative actions clearly its value as an assessment principle depends on our ability to adequately measure efficiency this article argues that citizen s coproduction in public services requires a careful reassessment of how we approach the measurement of productive efficiency in public service delivery theoretically we illustrate that using observable outcomes e g library circulation school results health outcomes fires extinguished and crimes solved as output indicators is inappropriate and leads to biased estimates of public service providers productive efficiency this bias arises because citizens co determine final outputs leaving them at least partly beyond the service providers control empirically we find supportive evidence of both the existence and importance of such demand induced bias

open economy macro policies and the micro foundation of labor market arrangements abstract in this paper we assume that risk neutral firms provide income insurance to risk averse workers through labor contracts however because of ad hoc transaction costs contracts are not fully contingent hence while contracts improve upon the allocation of risk they entail ex post production inefficiencies relative to a spot market where employment decisions are based upon realizes values of productivity shocks given this tradeoff there exists the possibility that both labor markets can coexist in equilibrium we analyze the effects of exchange rate policy on the distribution of agents across labor market arrangements and the expected utility of agents

capital income taxation equilibrium determinacy and the taylor principle abstract the taylor principle disregards nominal capital income taxation the paper derives a tax adjusted taylor principle and shows that empirical studies on monetary policy rules tend to reach too strong conclusions concerning the appropriateness of the monetary policy response to inflation

discretionary policy and multiple equilibria in lq re models we study discretionary equilibria in dynamic linear quadratic rational expectations models in contrast to the assumptions that pervade this literature we show that these models do have multiple equilibria in some situations we demonstrate the existence of multiple discretionary equilibria by example we investigate general properties of discretionary equilibria and discuss implications for numerical algorithms

aggregate information and the role of monetary policy in an open economy a model of a small open economy in which agents trade in local goods markets and an economy wide asset market is developed purchasing power parity is assumed to hold at the aggregate level however because of local deviations from purchasing power parity agents possess differential information using this framework it is shown that when the exchange rate is flexible monetary policy can influence the distribution of real output by altering the information content of the exchange rate however when monetary policy is committed to fixing the exchange rate by a feedback rule the distribution of real output is independent of the particular exchange rate rule chosen the stability of real output under the two regimes is compared and it is demonstrated that regardless of the stability of domestic monetary policy a flexible exchange rate regime is superior in this respect possible qualifications and extensions of these results are also discussed

backward looking interest rate rules interest rate smoothing and macroeconomic instability the existing literature on the stabilizing properties of interest rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation such rules have been found to give rise to aggregate fluctuations due to self fulfilling expectations in response to this concern a growing literature has focused on the stabilizing properties of interest rate rules whereby the central bank responds to a measure of past inflation the consensus view that has emerged is that backward looking rules contribute to protecting the economy from embarking on expectations driven fluctuations a common characteristic of the existing studies that arrive at this conclusion is their focus on local analysis the contribution of this paper is to conduct a more global analysis we find that backward looking interest rate feedback rules do not guarantee uniqueness of equilibrium we present examples in which for plausible parameterizations attracting equilibrium cycles exist the paper also contributes to the quest for policy rules that guarantee macroeconomic stability globally our analysis indicates that policy rules whereby the interest rate is set as a function of the past interest rate and current inflation are likely to ensure global stability provided that the coecient on lagged interest rates is greater than unity

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

an examination of the effects of government purchases in an open economy this paper examines the effects of permanent and transitory changes in government purchases in the context of a model of a small open economy that produces and consumes both traded and nontraded goods the model incorporates an equilibrium interpretation of the business cycle that emphasizes the responsiveness of agents to intertemporal relative price changes it is demonstrated that transitory increases in government purchases lead to an appreciation of the real exchange rate and an ambiguous change although a likely worsening in the current account while permanent increases have an ambiguous impact on the real exchange rate and no effect on the current account when agents do not know whether a given increase in government purchases is permanent or transitory the effect is a weighted average of these separate effects the weights depend on the relative variances of the transitory and permanent components of government purchases in the past few years a considerable amount of effort has been devoted to examining the effects of macroeconomic policy in an open economy such issues as exchange rate overshooting deviations from purchasing power parity sterilization and monetary control the effectiveness of monetary policy and the choice between alternative exchange rate regimes have been at center stage the models that have been employed to study these issues have run the spectrum from variants of the mundell fleming model such as dornbusch 1976 turnovsky 1981 and kimbrough 1983a to wage contracting and indexing models like bhandari 1982b and flood and marion 1982 to equilibrium models of the business cycle along the lines of bhandari 1982a saidi 1982 and kimbrough 1983b to the closely related intertemporal utility maximization models with money of helpman 1981 and stockman 1980 1983 one common thread that in a sense unifies all of these and other recent contributions is that they are concerned primarily with the effects of alternative monetary and exchange rate policies that the central bank might enact in light of the development and refinement during this period of the monetary approach to the balance of payments and the exchange rate it is not surprising i would like to thank phil brock jeremy greenwood gary zarkin and two anonymous

the information content of the exchange rate and the stability of real output under alternative exchange rate regimes abstract when the exchange rate is flexible and thus responds to market forces it provides agents with useful information while when it is fixed by a feedback rule it does not the implications of this asymmetry for the stability of real output under the two regimes is discussed it is shown that whenever shocks are predominantly of one variety or when domestic monetary shocks accompanied by one real shock a flexible exchange rate does a better job of stabilizing real output than does a fixed exchange rate these results undermine arguments favoring fixed exchange rates because they discipline monetary policy in addition it is demonstrated that managed floating rules and exchange rate feedback rules are irrelevant for the distribution of real output

returns to scale market power and the nature of price rigidity in new keynesian models with self fulfilling expectations increasing returns to scale and firms market power are two potential sources of sunspot expectations in neoclassical models we show that in new keynesian models returns to scale and market power can have fundamentally different implications for broad macroeconomic issues including self fulfilling expectations depending on the nature of price rigidity our findings suggest that the design of stabilization monetary policy can depend on precise knowledge about the economy s real and nominal features therefore a clear understanding of the specific economic environment and its relevance to monetary policymaking for ensuring macroeconomic stability can be an integrated part of monetary policy practice

investment interest rate policy and equilibrium stability abstract carlstrom and fuerst 2005 investment and interest rate policy a discrete time analysis journal of economic theory 123 4 20 show that in the presence of investment activity and price stickiness indeterminacy of equilibrium is induced by forward looking monetary policy that sets the interest rate in response only to future inflation in a stochastic version of their model we find that this indeterminacy problem is due to a cost channel of monetary policy whereby inflation expectations become self fulfilling and the problem can be overcome once the forward looking policy responds also to current output or contains sufficiently strong interest rate smoothing since this prevents the self fulfilling expectations we also show that when e stability is adopted as the selection criterion from multiple equilibria even the forward looking policy generates a locally unique non explosive e stable fundamental rational expectations equilibrium as long as the policy response to expected future inflation is sufficiently strong

the design of monetary and fiscal policy a global perspective abstract we study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies we show that the presence of capital is indeed another independent source of local and global multiplicities even under active policies that yield local determinacy we also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation we then explore the design of monetary policies that avoid multiple equilibria we show that interest rate policies that respond to the output gap while potentially a source of significant inefficiencies may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics

price indexation habit formation and the generalized taylor principle abstract we prove that the generalized taylor principle under which the nominal interest rate reacts more than one for one to a change in inflation in the long run is a necessary and under some extra mild restrictions on parameters sufficient condition for determinacy in a sticky price model with interest rate smoothing in monetary policy partial dynamic price indexation and habit formation in consumption

dynamic stability in a model of dual exchange rates abstract the dynamic stability of a small open economy operating under a regime of dual exchange rates is shown to depend on residents net foreign asset position this result is in contrast to the economy s dynamic behavior under unified fixed rate and flexible rate regimes where stability is unrelated to net foreign asset position

simulating weights restrictions in data envelopment analysis by means of unobserved dmus data envelopment analysis dea is a method for assessing the comparative efficiencies of decision making units e g banks and schools by relating their output to their input levels restrictions are often imposed in these assessments to reflect prior judgments on the values of input and or output variables this paper introduces a new approach to capturing and using value judgments in dea based on unobserved decision making units in so doing it opens up a whole new approach for reflecting value judgments in dea assessments which can offer advantages in certain situations

dual exchange rate systems and capital controls an investigation abstract the welfare aspects of dual exchange rate systems are analyzed in this paper the requirement that domestic financial transactions with the rest of the world be undertaken at a special foreign exchange rate is found to be equivalent to levying a tariff on this class of international transactions hence a dual exchange rate system and capital controls are shown to be essentially identical in light of the above statements the dual exchange rate system should be regarded as a form of commercial policy and be evaluated in this context by applying the applicable standard real trade theorems

anticipated shocks and the acceleration hypothesis the implication of wage indexation in his well cited contribution sachs 14 sets up a macromodel embodying the wage setting process perfect foresight and the portfolio balance feature it examines the exchange rate and current account responses to unanticipated fiscal expansion under alternative wage indexation rules he finds that in the nominal wage rigidity no wage indexation model the exchange rate depreciation coincides with a current account deficit in the real wage rigidity full wage indexation case the exchange rate again depreciates with a current account deficit and appreciates with a surplus 14 744 45 sachs s result is consistent with kouri s 12 acceleration hypothesis a current account deficit is accompanied by currency depreciation and conversely after the publication of the dorbusch and fischer 8 paper the literature on acceleration hypothesis has shifted from unanticipated shocks to anticipated shocks dorbusch and fischer 8 find that a negative correlation between the exchange rate and the current account prevails prior to the implementation of anticipated shocks consequently their conclusion indicates the acceleration hypothesis is not held when the economy experiences anticipated shocks bhandari 4 and papell 13 claim that the status of current account and the response of exchange rate can have either a positive or a negative correlation in response to anticipated shocks based on the fact that sachs 14 does not deal with the anticipated disturbances the first purpose of this paper thus tries to shed light on whether the alternative wage indexation schemes will affect the validity of the acceleration hypothesis in response to an anticipated fiscal expansion in an interesting paper aoki 1 bases on the modified dorbusch 7 model and examines the exchange rate responses to anticipated supply shocks he finds that an entirely different type of exchange rate adjustment pattern misadjustment path can arise when economic vari

monetary policy and the financial sector in this paper we study whether central banks should react to financial sector variables in their policy rules we find that responding to asset prices does not affect the determinacy conditions however responding to entrepreneurial net worth increases the likelihood of determinacy

exchange rate regimes in transition italy 1974 in order to explain the behavior of the lira during the operation of the italian two tier exchange market in 1973 74 we develop a model of exchange rate regimes in transition on the assumption that the market will set exchange rates so as to eliminate speculative profits at the time of transition the model indicates that expectations of a transition combined with uncertainty about the nature of the post transition regime can cause a jump in exchange rates at the moment of transition as well as volatile exchange rate movements prior to the transition the model suggests that the perceived temporariness of an exchange rate regime should be treated as a market fundamental

materials price increases and aggregate adjustment in an open economy a stochastic approach abstract this paper develops a stochastic macroequilibrium frameworks to analyze the differing implications of alternative types of input price disturbances the distinctions between expected and unexpected permanent and transitory nominal and real disturbances are considered the introduction of input disturbances involves a more elaborate modelling of the supply side of the economy both constant returns to scale and decreasing returns to scale technologies are considered the analysis highlights the sensitivity of the macroeconomic impacts of input price shocks to their specific type the analytical results obtained are not unambiguous and are supplemented with numerical simulations

exchange rate differential and balance of payments under dual exchange markets abstract this paper develops a model of an economy that uses two exchange markets an official market in which the exchange rate is determined by central bank intervention and a free market in which the exchange rate is determined by market forces the official market handles selected imports and exports while the free market handles the remaining imports and exports and capital transactions the model is used to discuss the effects of various policies on the differential between the free and the official exchange rates and on the balance of payments

world business cycles under fixed and flexible exchange rates this paper studies the behavior of monthly industrial production indices during the recent periods of fixed and flexible exchange rate s the central conclusions are as follows industrial production indices are subject to stochastic trend growth the variances of the monthly growth rates are higher in the flexible exchange rate period than in the fixed exchange rate period and are related to the degree of openness and to national income more open economies tend to experience more variability while richer more diversified economies experience less and output movements have been correlated across countries under both exchange rate regimes and there is evidence of a world business cycle copyright 1988 by ohio state university press

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

improving envelopment in data envelopment analysis under variable returns to scale in a data envelopment analysis model some of the weights used to compute the efficiency of a unit can have zero or negligible value despite of the importance of the corresponding input or output this paper offers an approach to preventing inputs and outputs from being ignored in the dea assessment under the multiple input and output vrs environment building on an approach introduced in allen and thanassoulis 2004 for single input multiple output crs cases the proposed method is based on the idea of introducing unobserved dmus created by adjusting input and output levels of certain observed relatively efficient dmus in a manner which reflects a combination of technical information and the decision maker s value judgements in contrast to many alternative techniques used to constrain weights and or improve envelopment in dea this approach allows one to impose local information on production trade offs which are in line with the general vrs technology the suggested procedure is illustrated using real data 2011 elsevier b v all rights reserved

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

terms of trade and exchange rate regimes in developing countries abstract since friedman essays in positive economics university of chicago press chicago 1953 157 203 an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks i use a post bretton woods sample 1973 96 of 75 developing countries to assess whether the responses of real gdp real exchange rates and prices to terms of trade shocks differ systematically across exchange rate regimes i find that responses are significantly different across regimes in a way that supports friedman s hypothesis the paper also examines the importance of terms of trade shocks in explaining the overall variance of output and prices in developing countries

optimal foreign exchange rate policy for a small open economy abstract this paper examines optimal exchange rate policy for a small open economy which faces temporary and pemanent real and nominal disturbances it demonstrates that exchange rate stabilization is desirable if most diturbances are nominal if most disturbances are real then stabilization should be greater 1 the greater the fraction of exchange rate variance accounted for by permanent disturbances 2 the greater the information available to firms in setting the wage 3 the greater the fraction of exchange rate variance attributed to domestic productivity shocks compared with foreign relative price shocks and 4 the more elastic is labor supply

real rigidities productivity improvements and investment dynamics abstract the theoretical literature on business cycles predicts a positive investment response to productivity improvements a prediction we question from theoretical and empirical perspectives we show that a short term negative response of investment to a positive technology shock is consistent with a reasonably parameterized new keynesian dynamic stochastic general equilibrium dsge model in which firm specific capital introduces an additional real rigidity and monetary policy is not fully accommodative employing bayesian techniques we provide evidence that permanent productivity improvements have short term contractionary effects on investment although this result can be obtained from both firm specific and rental capital models only in the case of the former is the average price duration in line with the microeconometric evidence

leaning against the credit cycle how should a central bank act to stabilize the ratio of debt over gross domestic product gdp we show how the persistent nature of household debt shapes the answer to this question in environments where households repay mortgages gradually surprise interest hikes only weakly influence household debt and tend to increase debt to gdp in the short run while reducing it in the medium run interest rate rules with a positive weight on debt to gdp cause indeterminacy compared to inflation targeting debt to gdp stabilization calls for a more expansionary policy when debt to gdp is high so as to deflate the debt burden through inflation and output growth

openness relative prices and macro policies abstract this paper analyzes the role of relative prices in the conduct of wage indexation monetary policy and exchange rate policy in a small economy producing traded and nontraded goods under a managed float exchange rate regime it is shown that the beneficial effect of using relative prices in addition to aggregate prices as indicators for the conduct of the above policies increases with openness the response of policies to relative prices rises with openness and has dampening effects on the volatility of deviations from purchasing power parity

optimal government finance policy and exchange rate management in a stochastically growing open economy abstract optimal monetary policy is analyzed in a stochastic small open economy consisting of risk averse representative agents the analysis shows how optimal monetary policy should be directed toward an optimal interest rate target this target which maximizes the intertemporal utility of the representative agent is determined by balancing off the marginal gains of a higher interest rate on increased growth and the future consumption it generates against the marginal losses stemming from a reduction in the holdings of real money balances the paper shows how an appropriately set monetary growth rate eliminates the need for continuous intervention in the exchange market

adjustment to monetary policy and devaluation under two tier and fixed exchange rate regimes abstract the purpose of this paper is to determine whether a two tier exchange rate regime is more effective than a fixed rate regime in increasing a country s ability to pursue an independent monetary policy the analysis compares adjustment to a monetary policy and to a devaluation in the two exchange rate regimes in a portfolio model under imperfect assets substitutability it is shown that a two tier exchange rate regime is capable of reducing the current account effects of monetary injection or devaluation only in the long run in the short run however we can get a larger current account response under a two tier regime these results reflect the trade off between quantity and price adjustment

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

real interest rate parity new measures and tests abstract international financial theory implies that for international comparisons the appropriate measure of the real interest rate is one defined in terms of traded goods prices alone new measures of the real interest rate are constructed using changes in price indexes for traded goods as deflators these new measures are tested for international real rate equality and the results are compared to those of similar tests using measures based on the change in the cpi and the wpi there are important differences between the traded goods real rate measures and those based on either the cpi or the wpi however in general the tests support the hypothesis that the real interest rate is approximately measured in terms of traded goods jel f30

money prices and the current account in a dual exchange rate regime abstract this paper examines the behavior of money prices and the current account in a dual exchange rate regime where all current account transactions take place at a pegged official rate and all capital account transactions occur at a freely floating financial rate the adjustment of a small open economy to a monetary disturbance under this regime is compared to that found under unified fixed and flexible rates the results concerning the behavior of the economy under dual rates are shown to apply also to an economy operating with fixed rates and controls on the international movement of capital

dual exchange rates capital controls and sticky prices abstract it is often argued that capital controls are an appropriate policy response to the exchange rate overshooting which occurs when asset markets adjust more rapidly than goods markets in this paper an intertemporal disequilibrium model of an open economy is developed in which the effect of capital controls is examined the results are contrasted with recent studies by adams and greenwood 1985 and obstfeld 1986 in which capital controls are evaluated within a purely equilibrium framework and thus inevitably take the form of a welfare reducing distortion

special exchange rates for capital account transactions the governments of developing countries are constrained in the effective implementation of domestic policy by the interlinkages of national and international financial markets domestic macroeconomic conditions are influenced by the interaction of national and world interest rates and prices and through the impact of real exchange rates on employment the domestic responses to changes in these factors are often strong and rapid this article suggests that dual rates can indeed be used successfully as a strictly transitory policy to offset sudden shocks in capital markets the article develops models which indicate why these dual systems are able to prevent inflationary or recessionary pressures caused by a misaligned exchange rate in the short term while free capital account rates can cut the flow of capital flight however a dual rate system cannot prevent a possibly equivalent loss of foreign reserves that will ultimately result because of the impact of the overvaluation of the commercial rate on the trade balance in the longer term a dual rate system with a misaligned commercial rate exacerbates the government s deficit ultimately real wages must be cut and real interest rates raised to generate sufficient foreign exchange to finance the external debt thus a dual rate works well if the commercial rate is maintained close to the equilibrium level

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

improving envelopment in data envelopment analysis data envelopment analysis defines the relative efficiency of a decision making unit dmu as the ratio of the sum of its weighted outputs to the sum of its weighted inputs allowing the dmus to freely allocate weights to their inputs outputs however this measure may not reflect a dmu s true efficiency as some inputs outputs may not contribute reasonably to the efficiency measure traditionally to overcome this problem weights restrictions have been imposed this paper offers a new approach to this problem where dmus operate a constant returns to scale technology in a single input multi output context the approach is based on introducing unobserved dmus created by adjusting the output levels of certain observed relatively efficient dmus reflecting a combination of technical information of feasible production levels and the dm s value judgments its main advantage is that the information conveyed by the dm is local with reference to a specific observed dmu the approach is illustrated on a real life application 2003 elsevier b v all rights reserved

capital and macroeconomic instability in a discrete time model with forward looking interest rate rules abstract we establish the necessary and sufficient conditions for local real determinacy in a discrete time production economy with monopolistic competition and a quadratic price adjustment cost under forward looking policy rules for the case where capital is in exogenously fixed supply and the case with endogenous capital accumulation using these conditions we show that i indeterminacy is more likely to occur with a greater share of payment to capital in value added production cost ii indeterminacy can be more or less likely to occur with constant capital than with variable capital iii indeterminacy is more likely to occur when prices are modelled as jump variables than as predetermined variables iv indeterminacy is less likely to occur with a greater degree of steady state monopolistic distortions and v indeterminacy is less likely to occur with a greater degree of price stickiness or with a higher steady state inflation rate in contrast to some existing research our analysis indicates that capital tends to lead to macroeconomic instability by affecting firms pricing behavior in product markets rather than households arbitrage activity in asset markets even under forward looking policy rules

introduction to monetary policy and capital accumulation the papers in this symposium address the issue of multiple equilibria that can be induced by monetary policy in models with capital accumulation in particular they examine how the taylor principle under which interest rates respond more than proportionately to increases in inflation can generate multiple equilibria they also explore the design of policies to avoid the problem of multiple equilibria and indeterminacy

limited asset markets participation monetary policy and inverted aggregate demand logic abstract this paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation while moderate participation rates strengthen the role of monetary policy low enough participation causes an inversion of results dictated by conventional wisdom the slope of the is curve changes sign the taylor principle is inverted optimal welfare maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed however a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation our results may justify fed s behavior during the great inflation period

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

insulation properties under dual exchange rates this paper reviews the insulation properties of a dual exchange rate regime it is shown that in general a dual regime is not successful in insulating the economy from monetary and real shocks of domestic and foreign origin the existence of incomplete segmentation of markets as well as the role played by real exchange rate changes as channels of transmission of disturbances to real equilibrium output are discussed

government debt economic activity and transmission of economic disturbances this paper analyzes the effects of government debt on output and the trade bala nce in a two country rational expectations model of the world economy it is shown that perceived changes in government debt do not affect the level of economic activity but unperceived changes in the home country s government debt are correlated positively with its output and negatively with its trade balance unperceived increases in the foreign country s government debt however have a positive impact on the home country s output and the trade balance empirical evidence from the u s is consistent with most of the implications of the model copyright 1987 by ohio state university press

exchange rate management and macroeconomic policy a national perspective this paper reviews the literature on alternative exchange rate arrangements for a small economy it discusses exchange rate management for short run stabilization purposes and the choice of exchange rate regimes to foster policy discipline recent research has emphasized that the appropriate degree of exchange rate flexibility depends on the nature of disturbances exchange rate movements provide information about shocks and can serve as a basis for intervention rules empirically operational guidelines have not yet been provided floating rates are said to be desirable because they allow policy makers greater autonomy recent research has questioned the implicit assumption that autonomy is always useful rules that prevent discretionary policy may be preferable what role if any the exchange rate should play in such rules has not yet been resolved

eliminating a deflationary trap through superinertial interest rate rules abstract this paper demonstrates that even in the presence of a zero lower bound on nominal interest rates central banks can eliminate a deflationary trap by the conduct of interest rate rules that have superinertia

lumpy investment sticky prices and the monetary transmission mechanism abstract smoothness in aggregate capital accumulation is a necessary condition for new keynesian nk models to imply a quantitatively relevant monetary transmission mechanism see e g woodford 2005 firm specific capital and the new keynesian phillips curve international journal of central banking 2 1 46 can that aggregate smoothness be entertained in the context of an nk model featuring lumpy plant level investment our answer is yes imperfect competition in goods markets and or sticky prices are identified as economic mechanisms which render lumpy investment relevant in general equilibrium

monetary and real shocks productive capacity and exchange rate regimes where producers may diversify internationally international diversification is shown to inuuce a positive correlation between the volatility of productivity shocks and investment in the presence of a phillips curve the expected gnp is lower under a floating exchange rate regime than under a fixed exchange rate regime this result applies both for real and monetary shocks attempts to reduce foreign direct investment by capital controls will tend to reduce welfare without affecting our results regarding the ranking of exchange rate regimes implies that in the presence of market power uncertainty tends to reduce investment in the first part of the paper i demonstrate the international diversi fication of production modifies this result foreign direct investment tends to offset the impact of market power on the concavity of the profit function by weakening the relative price effect associated with output changes and by increasing the flexibility of adjusting the variable input hence international diversification of production is shown to induce a positive correlation between the volatility of productivity shocks and investment the second part of the paper utilizes the framework presented in section i to re examine the welfare ranking of exchange rate regimes in the presence of capital mobility as is well appreciated a one dimensional answer regarding the merits of a fixed exchange rate regime will not do justice to the host of issues relevant for making the choice between exchange rate regimes the second part of the paper focuses on one aspect of the debate the linkages between volatility domestic and foreign direct investment and productive capacity a frequent argument in favour of exchange rate stability relates to the potential cost of exchange rate volatility which may work to increase the cost of international trade and to reduce its volume yet efforts to detect the adverse effects of exchange rate volatility on trade volumes in the last two decades have not delivered clear cut results in fact the experience of international trade among the united states canada europe and japan suggests that there is no natural

weak disposability in nonparametric production analysis with undesirable outputs environmental economics and natural resources group at wageningen university in the netherlands weak disposability of outputs means that firms can abate harmful emissions by decreasing the activity level modeling weak disposability in nonparametric production analysis has caused some confusion this article identifies a dilemma in these approaches conventional formulations implicitly and unintentionally assume all firms apply uniform abatement factors however it is usually cost effective to abate emissions in those firms where the marginal abatement costs are lowest this article presents a simple formulation of weak disposability that allows for non uniform abatement factors and preserves the linear structure of the model

a dynamic new keynesian life cycle model societal aging demographics and monetary policy in this paper we first construct a dynamic new keynesian model that incorporates life cycle behavior a la gertler 1999 in order to study whether structural shocks to the economy have asymmetric effects on heterogeneous agents namely workers and retirees we also examine whether considerations of life cycle and demographic structure alter the dynamic properties of the monetary business cycle model specifically the degree of amplification in impulse responses according to our simulation results shocks indeed have asymmetric impacts on different households and the demographic structure does alter the size of responses against shocks by changing the degree of the trade off between substitution and income effects

investment and interest rate policy a discrete time analysis this paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy it conducts the analysis in a calvo style sticky price model a key innovation is to add investment spending to the analysis in this environment local real indeterminacy is much more likely in particular all forward looking interest rate rules are subject to real indeterminacy

optimal monetary policy endogenous supply and rational expectations abstract in this paper we demonstrate that the choice of monetary policy regime will affect the variability of output when private agents in forming their supply decisions take into account the authority s selection of a policy rule a striking feature of the analysis is that the choice between policy rules in sargent wallace 1975 framework but with endogenous aggregate supply depends only on the variability of aggregate demand under each rule and not on the variability of aggregate supply it follows that the choice of monetary policy rules reduces to the problem analyzed by poole 1970 in the stochastic keynesian structure

is forward looking inflation targeting destabilizing the role of policy s response to current output under endogenous investment we show that with endogenous investment virtually all monetary policy rules that set a nominal interest rate in response solely to expected future inflation induce real indeterminacy in models with i staggered prices ii staggered prices and staggered wages and iii staggered prices staggered wages and firm specific capital in i policy s response to current output can help significantly in ensuring determinacy with an infinite labor supply elasticity but little with empirically plausible labor supply elasticity in ii responding to output always helps a great deal though under low price stickiness and without capital adjustment cost it may call for a moderate response to output in order to ensure determinacy for a wide range of response to inflation in iii even a tiny response to output can always render equilibrium determinate for a wide range of response to inflation

investment and monetary policy learning and determinacy of equilibrium we explore determinacy and expectational stability learnability of rational expectations equilibrium ree in new keynesian nk models that include capital using a consistent calibration across three different models labor only firm specific capital or an economy wide rental market for capital we provide a clear picture of when ree is determinate and learnable and when it is not under a variety of monetary policy rules our findings make a case for greater optimism concerning the use of such rules in nk models with capital while bullard and mitra s 2002 2007 findings for the labor only nk model do not always extend to models with capital we show that determinate and learnable ree can be achieved in nk models with capital if there is i plausible capital adjustment costs ii some weight given to output in the policy rule and or iii a policy of interest rate smoothing

the role of information acquisition and financial markets in international macroeconomic adjustment abstract international macroeconomic adjustment to money supply aggregate expenditure and relative demand disturbances is analyzed within a framework which emphasizes the role of information agents are unable to directly observe disturbances and may become fully informed about disturbances only by purchasing information we analyze how relative price and exchange rate adjustment depends on the variances of the underlying disturbances while taking into account the incentive to acquire information we also discuss the conditions which are necessary to preclude a free rider problem whereby uninformed agents are able to extract from observation of financial market conditions the exact information of the information buyers

search frictions real rigidities and inflation dynamics the standard new keynesian model suffers from the so called macro micro pricing conflict in order to match the dynamics of inflation implied by macroeconomic data the model needs to assume an average duration of price contracts which is much longer than what is observed in micro data here i show how departing from the standard model s assumption of a perfectly competitive labor market can help resolve the pricing conflict i do so by assuming search frictions in the labor market in this framework labor becomes firm specific and marginal cost curves become upward sloping this mechanism reduces the slope of the new keynesian phillips curve given a frequency of price adjustment conversely given an estimate of this slope my model implies shorter price durations than the standard model for a plausible calibration and for different slope values my model consistently delivers price durations that are roughly half of those implied by the standard model

firm specific capital nominal rigidities and the taylor principle in the presence of firm specific capital the taylor principle can generate multiple equilibria sveen and weinke new perspectives on capital sticky prices and the taylor principle j econ theory 123 2005 21 39 obtain that result in the context of a calvo style sticky price model one potential criticism is that the price stickiness which is needed for our theoretical result to be relevant from a practical point of view is somewhat to the high part of available empirical estimates in the present paper we show that if nominal wages are not fully flexible which is an uncontroversial empirical fact then the taylor principle fails already for some minor degree of price stickiness we use our model to explain the consequences of both nominal rigidities for the desirability of alternative interest rate rules

capital controls and international trade finance abstract this paper studies the effects of prohibiting individuals from holding foreign assets but of allowing firms to trade in foreign assets only up to what is needed to finance export and import activities although firms can perform arbitrage between domestic and foreign financial markets the distortions in asset markets are not fully arbitraged away but instead are transmitted to domestic goods markets the dynamics and steady state responses to a variety of shocks are crucially affected by capital controls even in the presence of capital controls the volatility of domestic interest rates can be substantial

determinants of the spread in a two tier foreign exchange market abstract the determinants of the spread between the commercial and financial exchange rates are analyzed in a two tier exchange market model derived from utility maximization contrary to popular belief it is found that domestic policy and non policy variables have no effect on the spread only foreign factors matter

on the viability of monetary unions abstract this paper contrasts the notion of optimality with that of viability of monetary unions and attempts to provide a positive analysis of the latter by dwelling upon herbert simon s work on models of bounded rationality a macro model developed by frenkel and aizenman is appended to the above theoretical framework and it is shown that viability is strictly related to certain specific properties of the economy