generalized method of moments and inverse control abstract this paper presents a generalized method of moments algorithm for estimating the structural parameters of a macroeconomic model subject to the restriction that the coefficients of the monetary policy rule minimize the central bank s expected loss function the algorithm combines least squares normal equations with moment restrictions derived from the first order necessary conditions of the auxiliary optimization we assess the performance of the algorithm with monte carlo simulations using three increasingly complex models we find that imposing the optimizing restrictions when they are true improves estimation accuracy and that imposing those restrictions when they are false biases estimates of some of the structural parameters but not of the policy rule coefficients

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

rules based monetary policy and the threat of indeterminacy when trend inflation is low abstract indeterminacy in new keynesian models with calvo contracts can occur even at low trend inflation levels of 2 or 3 the interaction of trend inflation with nominal wage rigidity and trend growth in output causes large distortions in the steady state and expands the indeterminacy region consequently even interest rate rules with strong inflation responses may not be sufficient to ensure determinacy a policy rule reacting to output growth but not to output gap significantly increases the prospect of determinacy although the threat of indeterminacy is less severe under taylor contracts significant departures from the original taylor principle are required for determinacy

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

myopia discretion and commitment in a two period as ad model a large body of pedagogical literature has recently emerged to place the new keynesian framework for analyzing business cycle fluctuations and the conduct of monetary policy into undergraduate economics curricula this article develops the graphical apparatus for the analysis of optimal monetary policy in the context of a two period model under alternative assumptions about the formation of inflationary expectations it demonstrates that differences in assumptions about the formation of inflationary expectations translate into quite different conclusions regarding the optimal conduct of monetary policy

cross checking optimal monetary policy with information from the taylor rule abstract this paper shows that monetary policy should be delegated to a central bank that cross checks optimal policy with information from the taylor rule placing some weight on deviations from a taylor rule reduces the stabilization bias of discretionary monetary policy

evaluating central banks tool kit past present and future abstract we develop a structural dsge model to systematically study the principal tools of unconventional monetary policy quantitative easing qe forward guidance and negative interest rate policy nirp as well as the interactions between them to generate the same output response the requisite nirp and forward guidance interventions are twice as large as a conventional policy shock which seems implausible in practice in contrast qe via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound quantitatively qe1 qe3 can account for two thirds of the observed decline in the shadow federal funds rate in spite of its usefulness qe does not come without cost a large balance sheet has consequences for different normalization plans the efficacy of nirp and the effective lower bound on the policy rate

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

inflation targeting and liquidity traps under endogenous credibility abstract policy implications are derived for an inflation targeting central bank whose credibility is endogenous and depends on its past ability to achieve its targets this is done in a new keynesian framework with heterogeneous and boundedly rational expectations we find that the region of allowed policy parameters is strictly larger than under rational expectations however when the zero lower bound on the nominal interest rate is accounted for self fulfilling deflationary spirals can occur depending on the credibility of the central bank deflationary spirals can be prevented with a high inflation target and aggressive monetary easing

revealing the preferences of the us federal reserve we use bayesian methods to estimate changes in us post war monetary policy in the smets and wouters model we perform the estimations by allowing for a break in monetary policy at the time of volcker s appointment as chairman this enables us to capture changes in the monetary policy regime introduced by volcker during the volcker greenspan period we find support for the assumption that monetary policy in the volcker greenspan period performed optimally under commitment our estimation strategy allows us to estimate the preferences of the us federal reserve in the volcker greenspan period where the main objective of policy appears to be inflation followed by interest rate stabilization output growth and interest rate smoothing we find that the great moderation of output growth is explained by a combination of two factors the decrease in the volatility of the structural shocks and the improved monetary policy conduct inflation stabilization however is mainly due to the change in monetary policy that took place at the beginning of volcker s mandate copyright 2010 john wiley sons ltd

dollarization of bank deposits causes and consequences abstract this paper assesses the benefits and risks associated with dollarization of bank deposits we provide novel empirical evidence on the determinants of deposit dollarization its role in promoting financial development and on whether dollarization is associated with financial instability we find that a the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross country variations in dollarization b dollarization is likely to promote financial deepening only in a high inflation environment and c financial instability is likely higher in dollarized economies the implications of these findings for financial sector and monetary policies are briefly discussed

optimal interest rate smoothing this paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions it shows in the context of a simple model of optimizing private sector behaviour that assignment of an interest rate smoothing objective to the central bank may be desirable even when reduction of the magnitude of interest rate changes is not a social objective in itself this is because a response of policy to irrelevant lagged variables may be desirable owing to the way it steers private sector expectations of future policy

exchange rate pass through when market share matters the authors investigate the pass through from exchange rates to import prices when firms future demands depend on their current market shares they show that profit maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily i e the pass through may be perverse and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates they present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of u s import prices copyright 1989 by american economic association

monetary policy in a forward looking input output economy this paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a new keynesian model both optimal policy under commitment and discretionary policy under simple loss functions are studied household utility losses under alternative loss functions are compared additionally the robustness of policy performance to model and shock misperceptions and parameter uncertainty is examined targeting inflation in both consumer and intermediate goods performs better than targeting inflation in one sector targeting price levels of both final and intermediate goods performs significantly better moreover targeting price levels in both sectors yields superior robustness properties

excess reserves monetary policy and financial volatility abstract this paper examines the real and financial effects of reserves in a dynamic stochastic general equilibrium dsge model with monopoly banking and credit market imperfections the framework explicitly accounts for the fact that commercial banks hold excess reserves and they incur costs in holding these assets the model also accounts for imperfect substitutability between bank funding sources and it shows that this feature is an important channel through which reserve requirement shocks can affect real variables numerical experiments show that an increase in reserve requirements creates a countercyclical effect for real economic activity the results also indicate that the combination of an augmented taylor rule which responds to excess reserves and a countercyclical reserve requirement rule is optimal to mitigate macroeconomic and financial volatility associated with liquidity shocks

monetary policy response to oil price shocks how should monetary authorities react to an oil price shock this paper shows that in a noncompetitive economy policies that perfectly stabilize prices entail large welfare costs hence explaining the reluctance of policymakers to enforce them the policy trade off is nontrivial because oil energy is an input to both production and consumption as welfare maximizing policies are hard to implement and communicate i derive a simple interest rate rule that depends only on observables but mimics the optimal plan in all dimensions the optimal rule is hard on core inflation but accommodates oil price changes

testing for the cointegrating rank of a var process with structural shifts tests for the cointegrating rank of a vector autoregressive process are considered that allow for possible exogenous shifts in the mean of the data generation process the break points are assumed to be known a priori it is proposed to estimate and remove the deterministic terms such as mean linear trend term and a shift in a first step then systems cointegration tests are applied to the adjusted series the resulting tests are shown to have known limiting null distributions that are free of nuisance parameters and do not depend on the break point the tests are applied for analyzing the number of cointegrating relations in two german money demand systems

monetary policy rules in theory and in practice evidence from the uk and the us given the large amount of interaction between research on monetary policy and its practice this article examines whether some simple monetary policy rules that have been proposed in the academic literature part of which has originated from within central banks provide a reasonable characterization of actual policy in the united kingdom and the united states the article finds the simple rule that describes best the actual us monetary policy is a speed limit rule with dynamics whilst for the uk it is a forward looking rule the simpler dynamics in the uk s monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

to react or not technology shocks fiscal policy and welfare in the eu 3 this paper develops a dynamic stochastic general equilibrium dsge model to examine the quantitative macroeconomic implications of counter cyclical fiscal policy for france germany and the uk the model incorporates real wage rigidity and consumption habits as the particular market failures justifying policy intervention we subject the model to productivity shocks and allow policy instruments to react to the output gap and the debt to output ratio a welfare analysis reveals that the most effective instrument target combination is to use public consumption to stabilize the output gap moreover welfare gains from counter cyclical fiscal policy are much stronger in the presence of wage rigidities compared with consumption habits finally since active policy and automatic stabilizers are substitutes it is possible that relatively undistorted economies may be in need of countercyclical fiscal action due to inadequate automatic stabilizers

exchange rate changes and inflation in post crisis asian economies vector autoregression analysis of the exchange rate pass through macro economic consequences of large currency depreciations among the crisis hit asian economies varied from one country to another inflation did not soar after the asian currency crisis of 1997 98 in most crisis hit countries except indonesia where high inflation followed a very large nominal depreciation of the rupiah the high inflation meant a loss of price competitive advantage a key for economic recovery from a crisis this paper examines the pass through effects of exchange rate changes on the domestic prices in the east asian economies using a vector autoregression analysis the main results are as follows i the degree of exchange rate pass through to import prices was quite high in the crisis hit economies ii the pass through to consumer price index cpi was generally low with a notable exception of indonesia and iii in indonesia both the impulse response of monetary policy variables to exchange rate shocks and that of cpi to monetary policy shocks were positive large and statistically significant thus indonesia s accommodative monetary policy coupled with the high degree of cpi responsiveness to exchange rate changes was an important factor in the inflation depreciation spiral in the wake of the currency crisis

nowcasting and the taylor rule actual federal funds rates in the u s have at times deviated from the recommendations of a simple taylor rule this paper proposes a nowcasting taylor rule that preserves the form of the taylor rule but encompasses realistic assumptions on information observable to policymakers because contemporaneous inflation rates and output gaps are not observable at the time policy is set policymakers must form nowcasts the optimal nowcast will depend in part on forecast uncertainty whenever policymakers have asymmetric costs to over and underpredicting inflation and output empirical evidence shows that actual policy rates are consistent with those recommended by a nowcasting taylor rule

inflation price level and hybrid rules under inflation uncertainty the performance and robustness of optimised interest rate rules are analysed in a new keynesian model estimated for the euro area economy in particular we examine the properties of rules responding to inflation the price level or a combination of the two a hybrid rule all the rules also respond to the output gap the optimal hybrid rule is only marginally superior when there is no model uncertainty when there is uncertainty about the degree of inflation persistence the inflation rule is the most robust rule and the performance of the other two rules deteriorates however all the rules perform well if the true degree of inflation persistence turns out to be less than policymakers estimate

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

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

a comparative analysis of the stabilizing properties of nominal income growth targeting given highly persistent cost push shocks the relative performance of nominal income growth targeting depends critically on the size of two key parameters barring extreme preferences nominal income growth targeting performs fairly well relative to commitment and pure discretion for small values of the phillips curve parameter

low inflation pass through and the pricing power of firms abstract recently there has been a significant decline in the degree to which firms pass through changes in costs to prices a decline that is frequently characterized as a reduction in the pricing power of firms the decline appears to be associated with the decline in inflation in many countries the decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation some have argued that the decline in pricing power helped to keep inflation low in the face of apparently strong demand pressures in the united states in the late 1990s this paper puts forth the view that the decline in pass through or pricing power is due to the low inflation environment that has recently been achieved in many countries first a microeconomic model of price setting is used to show that lower pass through is caused by lower perceived persistence of cost changes evidence is then presented showing that inflation is positively correlated with persistence of inflation suggesting that the low inflation itself has caused the low pass through an economy wide model consistent with the micromodel is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways but can disappear quickly if monetary policy and expectations change

the new keynesian phillips curve from sticky inflation to sticky prices the new keynesian phillips curve nkpc model of inflation dynamics based on forward looking expectations is of great theoretical significance in monetary policy analysis empirical studies however often find that backward looking inflation inertia dominates the dynamics of the short run aggregate supply curve this inconsistency is examined by investigating multiple structural changes in the nkpc for the u s between 1960 and 2005 employing both inflation expectations survey data and a rational expectations approximation we find that forward looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation providing empirical support for sticky price models over the last two decades a break in the intercept of the nkpc is also identified around 2001 and this may be associated with u s monetary policy in that period

exchange rate and inflation dynamics in dollarized economies abstract we use a panel of a hundred plus countries with differing degrees of dollarization to perform an empirical analysis of the effects on inflation of exchange rate depreciations the results qualify the common view that countries with higher dollarization exhibit higher inflation pass through we show that large depreciations tend to generate a negative impact on the pass through coefficient this impact being more intense the higher the level of dollarization of the economy we interpret this as evidence that in highly dollarized economies the classic inflationary effects of a real depreciation higher internal demand and imported inflation can be offset or diminished by both the larger financial costs and the balance sheet effect especially if the depreciation is large additionally the exchange rate regime is shown to matter countries with fixed exchange rates suffer more noticeably the balance sheet effects of large depreciations

solution and estimation of re macromodels with optimal policy macro models of monetary policy typically involve forward looking behavior except in rare circumstances we have to apply some numerical method to find the optimal policy and the rational expectations equilibrium this paper summarizes a few useful methods and shows how they can be combined with a kalman filter to estimate the deep model parameters with maximum likelihood simulations of a macro model with staggered price setting interest rate elastic output and optimal monetary policy illustrate the properties of this estimation approach

exclusive dealing limiting outside activity and conflict of interest exclusive dealing is one of a number of non price vertical restraints that have become the subject of considerable scrutiny and rethinking both in the courts and in the academic literature 2 8 10 17 because of its association with antitrust law the emphasis of the exclusive dealing literature 3 7 13 16 21 has been on whether exclusive dealing can enhance or protect a firm s market power exclusive dealing and related restrictions on agent activities however are far more widespread than can credibly be attributed to antitrust considerations or interfirm strategic behavior the range of instances where exclusive dealing broadly construed applies is quite large including the familiar manufacturer retailer relationship as well as other situations where there may be a conflict of interest the decision to hire a worker to do a job or to have the job done by an independent contractor could be interpreted as the decision whether a firm wants its workers to exclusively deal their labor the exclusivity question arises in less formal or familiar settings as well should one for example permit a babysitter to have friends visit or should her attention be exclusively directed toward one s children should a university permit its faculty to engage in outside consulting or non university sponsored research or should it lay down rules restricting the time available for outside activities or the types of outside research that can be carried out antitrust courts and legal commentators over the past ten years especially since sylvania 4 have come to view non price vertical restraints more benignly than in the past 2 299 304 15 17 18 20 benign neglect however offers no help to a firm wondering whether to institute exclusive dealing not only may the costs and benefits of doing so be subtle but the decision may be controversial among the affected parties in the conventional exclusive dealing case retailers may not want a major supplier to cut them off if they continue to sell another manufacturer s product and will likely demand to be compensated for their lost business opportunities exclusive dealing may be viewed as the limiting version of a policy to limit outside activities by agents the purpose of this paper is to set out a very general neoclassical choice framework to discover conditions in which exclusive dealing or limitations on outside activities to mitigate conflicts of interest can enhance the operating efficiency of a vertical relationship a specific goal

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

estimating potential output core inflation and the nairu as latent variables this article proposes a new method to obtain estimates of the nairu the core inflation rate and the trend investment rate for the united states using an unobserved components model that is compatible with the usual decomposition of real gross domestic product into trend and cycle the model includes okun s law a forward looking phillips curve and an accelerator type investment equation and accounts for some volatility breaks in two components the unknown parameters in the model are estimated by maximum likelihood using a kalman filter initialized with a partially diffuse prior and the unobserved components are estimated using a smoothing algorithm our results show that the output gap is positively correlated with the deviations of the investment rate from its trend and the inflation rate from core inflation and negatively correlated with the deviations of the unemployment rate from the nairu

designing a simple loss function for central banks does a dual mandate make sense yes it makes a lot of sense this paper studies how to design simple loss functions for central banks as parsimonious approximations to social welfare we show both analytically and quantitatively that simple loss functions should feature a high weight on measures of economic activity sometimes even larger than the weight on inflation two main factors drive our result first stabilising economic activity also stabilises other welfare relevant variables second the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand the result holds up in the presence of measurement errors with large shocks that generate a trade o between stabilising inflation and resource utilisation and also when imposing a moderate degree of interest rate volatility

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

optimal monetary policy with the cost channel in the standard new keynesian framework an optimizing policy maker does not face a trade off between stabilizing the inflation rate and stabilizing the gap between actual output and output under flexible prices an ad hoc exogenous cost push shock is typically added to the inflation equation to generate a meaningful policy problem in this paper we show that a cost push shock arises endogenously when a cost channel for monetary policy is introduced into the new keynesian model a cost channel is present when firms marginal cost depends directly on the nominal rate of interest besides providing empirical evidence for a cost channel we explore its implications for optimal monetary policy we show that its presence alters the optimal policy problem in important ways for example both the output gap and inflation are allowed to fluctuate in response to productivity and demand shocks under optimal monetary policy

economic and social convergence in colombia royuela v and garcia g a economic and social convergence in colombia regional studies gross domestic product gdp has usually been used as a proxy for human well being nevertheless other social aspects should also be considered such as life expectancy infant mortality educational enrolment and crime issues this paper investigates economic and social convergence between regions in colombia in the period 1975 2005 the main results confirm that there is convergence in colombia in key social variables although not in the classic economic variable gdp per capita it is also found that spatial autocorrelation reinforces convergence processes through deepening market and social factors while isolation condemns regions to non convergence

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

the external finance premium and the macroeconomy us post wwii evidence abstract the central variable of theories of financial frictions the external finance premium is unobservable this paper distils the external finance premium from a dynamic stochastic general equilibrium dsge model estimated on us macroeconomic data covering the period 1954 to 2004 within the dsge framework movements in the premium can be given an interpretation in terms of shocks driving business cycles a key result is that the estimate based solely on non financial macroeconomic data picks up over 70 of the dynamics of lower grade corporate bond spreads the paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected

monetary policy with sectoral trade offs we formulate a two sector new keynesian economy that features sectoral heterogeneity along three main dimensions price stickiness consumption goods durability and the inter sectoral trade of input materials the combination of these factors deeply affects inter sectoral and intra sectoral stabilization in this context we examine the welfare properties of simple rules that adjust the policy rate in response to the output gap and alternative measures of final goods price inflation aggregating durable and non durable goods prices depending on the relative frequency of sectoral price setting may induce a severe bias due to factor demand linkages the cost of production in one sector is influenced by price setting in the other sector of the economy as a result measures of aggregate inflation that weigh sectoral price dynamics based on the relative degree of price rigidity do not allow the central bank to keep track of the effective speeds of sectoral price adjustment

an empirical assessment of optimal monetary policy in the euro area we estimate a new keynesian dsge model for the euro area under alternative descriptions of monetary policy discretion commitment or a simple rule after allowing for markov switching in policy maker preferences and shock volatilities this reveals that there have been several changes in euro area policy making with a strengthening of the anti inflation stance in the early years of the erm which was then lost around the time of german reunification and only recovered following the turmoil in the erm in 1992 the ecb does not appear to have been any more conservative as aggregate euro area policy was under bundesbank leadership the estimates also suggest that the most appropriate description of policy is that of discretion with no evidence of commitment in the euro area as a result although both good luck and good policy played a role in the moderation of inflation and output volatility in the euro area the welfare gains would have been substantially higher had policy makers been able to commit adopting a flexible price level target would lead to outcomes close to commitment

targeting nominal income growth or inflation within a simple new keynesian model emphasizing forward looking behavior of private agents i evaluate optimal nominal income growth targeting versus optimal inflation targeting when the economy is mainly subject to shocks that do not involve monetary policy trade offs for society inflation targeting is preferable otherwise nominal income growth targeting may be superior because it induces inertial policy making which improves the inflation output gap trade off somewhat paradoxically inflation targeting may be relatively less favorable the more society dislikes inflation and the more persistent are the effects of inflation generating shocks jel e42 e52 f58

accountability transparency and inflation targeting inflation targeting regimes define a performance measure for the central bank a regime that places a large small weight on achieving the target is analogous to a high low powered incentive scheme high powered incentive structures promote accountability but may distort stabilization policy the optimal power under inflation targeting is derived under perfect and imperfect information the fundamental trade off between accountability and stabilization depends on the degree of transparency defined as the ability to monitor the central bank s performance multiplicative uncertainty increases the optimal weight to place on achieving an inflation target

the forecasting power of real interest rate gaps an assessment for the euro area the real interest rate gap irg the gap between the short term real interest rate and its natural level is a theoretical concept that has attracted much attention in central banks in recent years this article aims at clarifying its practical relevance for monetary policy in real time for this purpose it provides an empirical assessment of the usefulness of a semi structural versus purely statistical estimates of the real irg for predicting policy relevant macroeconomic variables in the euro area however mixed the results confirm that semi structural estimates of the real irg deserve being added to the central banks toolbox

pass through in dollarized countries should ecuador abandon the us dollar in this article we examine the convenience of dollarization for ecuador today as ecuador is strongly integrated financially and commercially with the united states the exchange rate pass through should be zero however we sustain that rising rates of imports from trade partners other than the united states and subsequent real effective exchange rate depreciations are causing the pass through to move away from zero here in the framework of the vector error correction model we analyse the impulse response function and variance decomposition of the inflation variable we show that the developing economy of ecuador is importing inflation from its main trading partners most of them emerging countries with appreciated currencies we argue that if ecuador recovered both its monetary and exchange rate instruments it would be able to fight against inflation we believe such an analysis could be extended to other countries with pegged exchange rate regimes

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

average inflation targeting the analysis of this paper demonstrates that when the phillips curve has forward looking components a goal for average inflation i e targeting a j period average of one period inflation rates will cause inflation expectations to change in a way that improves the short run trade off faced by the monetary policymaker average inflation targeting is thus an example of a modified loss function which when implemented in a discretionary fashion results in more efficient outcomes from the standpoint of the true social objective inflation targeting under commitment than the discretionary pursuit of the true objective itself in purely forward looking models average inflation targeting is dominated by price level targeting but we also demonstrate in a micro founded model where the phillips curve has both forward and backward looking components that there are cases when the average inflation target provides more efficient outcomes than both ordinary one period inflation targeting and price level targeting

how important is precommitment for monetary policy we quantify the welfare differential between precommitment and discretionary monetary policy in three estimated models of the u s economy by calculating the permanent deviation of inflation from target that in welfare terms is equivalent to moving from discretion to precommitment using a range of reasonable central bank preference parameters this inflation equivalent ranges from 0 05 to 3 6 percentage points with a mid point of either 0 15 or 1 1 5 percentage points depending on the model in addition to the degree of forward looking behavior we show that the existence of transmission lags and or information lags is crucial for determining the welfare gain from precommitment

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

input output interactions and optimal monetary policy this paper deals with the implications of factor demand linkages for monetary policy design in a two sector dynamic general equilibrium model part of the output of each sector serves as a production input in both sectors in accordance with a realistic input output structure strategic complementarities induced by factor demand linkages significantly alter the transmission of shocks and amplify the loss of social welfare under optimal monetary policy compared to what is observed in standard two sector models the distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy a flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability otherwise targeting gross output variability entails a substantial increase in the loss of welfare

loan loss provisioning rules procyclicality and financial volatility interactions between loan loss provisioning regimes and business cycle fluctuations are studied in a dynamic stochastic general equilibrium model with credit market imperfections with a specific provisioning system provisions are triggered by past due payments with a dynamic system both past due payments and expected losses over the whole business cycle are accounted for and provisions are smoothed over the cycle numerical experiments with a parameterized version of the model show that a dynamic provisioning regime can be highly effective in mitigating procyclicality of the financial system the results also indicate that the combination of a credit gap augmented taylor rule and a dynamic provisioning system with full smoothing may be the most effective way to mitigate real and financial volatility associated with financial shocks

speed limit policies the output gap and optimal monetary policy in a standard new keynesian model a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal timeless perspective precommitment policy by stabilizing output gap changes the central bank imparts inertia into output and inflation that is absent under pure discretion even a fully optimizing i e non myopic central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting this abstract was borrowed from another version of this item

when is discretion superior to timeless perspective policymaking the monetary policy literature assumes increasingly that policy is formulated according to the timeless perspective woodford 1999a however by treating appropriately the auxiliary state variables that characterize the timeless perspective equilibrium when evaluating policy performance this paper shows that discretionary policymaking can be superior to timeless perspective policymaking and identifies model features that make this outcome more likely using standard new keynesian dsge models discretion is found to dominate timeless perspective policymaking when the price wage phillips curves are relatively flat due perhaps to firm specific capital or labor and or kimball 1995 aggregation in combination with nominal rigidities these results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion paying careful attention to how policy performance is evaluated

optimal monetary policy and the role of hybrid inflation price level targets this study investigates the role of hybrid inflation price level targets as a solution to the well known stabilization bias problem that arises under discretionary policies the analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank s target variables in addition to the output gap growth target the reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way in particular the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate

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

determining optimal monetary speed limits abstract the proposal by walsh 2003 that policy should include a speed limit by having the change in the output gap as an additional term in a taylor type rule is shown to be exactly optimal given an appropriate parameterization

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

a happy half way house medium term inflation targeting in new zealand abstract the 2002 policy targets agreement pta between the government and central bank of new zealand asks the central bank to target inflation over the medium term rather than over an annual target delegating such a medium term objective to the central bank shifts inflation targeting towards a halfway house between inflation targeting and price level targeting we show empirically that this helps time consistent policy approximate the first best commitment policy even when the government asks the central bank to weight output stabilisation differently to society we estimate the new zealand economy with a small open economy dsge model and show that the happiest halfway house is located around a two year averaging horizon at most which leads to mild improvements in monetary policy efficiency

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

monetary and macroprudential policies in a leveraged economy we examine the optimal monetary policy in the presence of endogenous feedback loops between asset prices and economic activity when macroprudential policies can also be pursued absent macroprudential policies the optimal monetary policy leans against asset prices and can be closely approximated using a speed limit rule that responds to the growth of financial variables an endogenous feedback loop is crucial for this result price stability is otherwise quasi optimal similarly a simple macroprudential rule that links reserve requirements to credit growth dampens the endogenous feedback loop and leads to near price stability state contingent taxes on lending are shown to be welfare improving

dynamic inconsistencies counterfactual implications of a class of rational expectations models a number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations while the theoretical motivation behind these models is sound the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data for both inflation and real side variables exhibit gradual and hump shaped responses to real and monetary shocks for models that are intended for monetary policy analysis these dynamic shortcomings should be considered quite serious when monetary policy has only short run effects on real variables the inability to approximately capture the short run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis this paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem the paper also discusses several potential solutions to the problem including alterations to the expectations assumption to the order of differencing implicit in the model and to the underlying behavioral assumptions this abstract was borrowed from another version of this item

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

regional economic growth and human capital the role of over education ramos r surinach j and artis m regional economic growth and human capital the role of over education regional studies this article analyses the link between human capital and regional economic growth in the european union using various indicators of human capital calculated from census microdata it is concluded that the recent economic performance of european regions is associated with an increase in over education in fact measures of educational mismatch seem to be more strongly connected to regional economic performance than do other traditional measures of human capital stock ramos r surinach j and artis m ramos r surinach j et artis m la croissance economique regionale et le capital humain l impact de la sureducation regional studies cet article cherche a analyser le lien entre le capital humain et la croissance economiqu

endogenous objectives and the evaluation of targeting rules for monetary policy recent research in monetary economics has followed the advice of mccallum 1988 robustness properties of a rule for monetary policy carnegie rochester conference series on public policy 29 173 203 and investigated the robustness properties of monetary policy rules by evaluating them in a variety of models evaluation across models is typically based on an exogenously specified loss function however the theory on which many recent monetary policy models are based implies that changes in the structure of the model also have consequences for the policy objectives the central bank should pursue objectives are endogenous not exogenous to the model in this paper i investigate the impact of endogenous objectives on the evaluation of targeting rules for monetary policy r 2005 elsevier b v all rights reserved

historical monetary policy analysis and the taylor rule this study examines the usefulness of the taylor rule framework as an organizing device for describing the policy debate and evolution of monetary policy in the united states monetary policy during the 1920s and since the 1951 treasury federal reserve accord can be broadly interpreted in terms of this framework with rather surprising consistency in broad terms during these periods policy has been generally formulated in a forward looking manner with price stability and economic stability serving as implicit or explicit guides as early as the 1920s measures of real economic activity relative to normal or potential supply appear to have influenced policy analysis and deliberations confidence in such measures as guides for activist monetary policy proved counterproductive at times resulting in excessive activism such as during the great inflation and at the brink of the great depression policy during the past two decades is broadly consistent with natural growth targeting variants of the taylor rule that exhibit less activism

optimal monetary policy with asymmetric preferences for output abstract we extend ruge murcia 2003 2004 to weigh inflation and output and show that empirical evidence supports an asymmetric preference hypothesis for output we also find evidence that the monetary authority targets potential output in parallel to barro and gordon 1983

the timeless perspective vs discretion theory and monetary policy implications for an open economy abstract compared to the standard phillips curve an open economy version that features a real exchange rate channel leads to a markedly different target rule in a new keynesian optimizing framework under optimal policy from a timeless perspective tp the target rule involves additional history dependence in the form of lagged inflation the target rule also depends on more parameters notably the discount factor as well as two is and two phillips curve parameters stabilization policy in this open economy model is no longer isomorphic to policy in a closed economy because of the additional history dependence in an open economy target rule price level targeting is no longer consistent with optimal policy the gains from commitment are smaller in economies where the real exchange rate channel exerts a direct effect on inflation in the phillips curve

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

fiscal sustainability and dollarization the case of ecuador abstractthis article tries to disentangle the dynamic relationships between fiscal variables and economic activity in a small emerging economy characterized by full dollarization namely ecuador we find that fiscal policy in ecuador seems to be sustainable explained by its policy of debt payment through oil revenues rather than by a fiscal discipline that dollarization is supposed to encourage the non oil tax revenues variable is a purely adjusting variable this result suggests that in a dollarized country that cannot benefit from the seignorage revenues the reliance on volatile oil revenues and on smoothing tax revenues leaves the economy s fiscal sustainability vulnerable

indexing the income tax code monetary fiscal interaction and the great moderation abstract this paper considers the consequences of automatically indexing the us federal income tax code to inflation indexation implemented during the 1981 federal tax overhaul and active monetary policy constitute necessary conditions for a unique rational expectations equilibrium in standard new keynesian models with a generalized progressive labor income tax additionally fixing the monetary regime shows that indexation reduces overall volatility in the model as well as the contribution of supply side disturbances together these results support a fiscal extension to the good policy hypothesis of the great moderation and encourage further indexation of the united states tax code

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

efficiency wages financial market integration and the fiscal multiplier abstract we used a new open economy macroeconomic model featuring a labor market friction in the form of efficiency wages to analyze the implications of financial market integration for the fiscal multiplier the fiscal multiplier measures the accumulated effect of fiscal policy on output conventional wisdom based on the basic textbook version of the classic mundell fleming model suggests that the fiscal multiplier should become smaller as financial markets become more integrated we show that a labor market friction in the form of efficiency wages implies that financial market integration should increase the fiscal multiplier

inflation inertia and the optimal hybrid inflation price level target a hybrid inflation price level target combines elements of both inflation and price level targets the paper derives an optimal hybrid target within a new keynesian model with inflation persistence due to price indexation the result generalizes a result by vestin forthcoming that the optimal policy could be implemented with a price level targeting regime we show that the optimal price level drift in the hybrid target is equal to the degree of price indexation if there is complete indexation the optimal monetary regime is inflation targeting

monetary policy trend inflation and unemployment volatility the literature has long agreed that the dmp model after diamond 1982 mortensen 1982 pissarides 1985 with search and matching frictions in the labor market can deliver large volatilities in labor market quantities consistent with empirical data only if there is at least some wage stickiness i show however that the model can deliver nontrivial volatilities without wage stickiness as long as it has price dispersion and nonzero long run inflation rates i find that by keeping inflation at a positive rate monetary policy may be accountable for the large standard deviations observed on labor market variables in addition the shimer 2005 puzzle disappears under monetary policy shocks

how robustness can lower the cost of discretion model uncertainty has the potential to change importantly how monetary policy is conducted making it an issue that central banks cannot ignore using a standard new keynesian business cycle model this paper analyzes the behavior of a central bank that conducts policy under discretion while fearing that its model is misspecified the main results are as follows first policy performance can be improved if the discretionary central bank implements a robust policy this important result is obtained because the central bank s desire for robustness directs it to assertively stabilize inflation thereby mitigating the stabilization bias associated with discretionary policymaking second the central bank s fear of model misspecification leads it to forecast future outcomes under the belief that inflation in particular will be persistent and have large unconditional variance raising the probability of extreme outcomes private agents however anticipating the policy response make decisions under the belief that inflation will be more closely stabilized that is more tightly distributed than under rational expectations finally as a technical contribution the paper shows how to solve with robustness an important class of linear quadratic decision problems

a structural decomposition of the us yield curve abstract by expanding the macro part of macro finance models historical fluctuations in us bond yields turn out to be largely consistent with the rational expectations hypothesis we estimate a medium scale macro finance dsge model of the term structure to establish this our finding contrasts with existing macro finance models and suggests that their small scale or non structural perspective on the macroeconomy mutes expectations thereby underestimating the expectations hypothesis potential out of sample forecasts are competitive with more flexible term structure models given the empirical validation we interpret various episodes through the lens of the model and investigate which structural shocks cause the yield curve to contain information about future growth

delegating optimal monetary policy inertia abstract in a forward looking business cycle model central banks can achieve the timeless optimal commitment equilibrium even in the absence of a commitment technology if they are delegated with an objective function that is different from the societal one the paper develops a general linear quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a markov perfect equilibrium and studies the optimal design of some policy regimes that are nested within this framework the squared optimal targeting rule inflation output gap growth and nominal income growth targeting and inflation and output gap contracts