targeting inflation by constant interest rate forecasts this paper reviews the concept of constant interest rate inflation forecast cir targeting it stresses the time inconsistent nature of cir targeting and provides a new method for constructing cir forecasts consistently in the context of models with forward looking variables a dynamic new keynesian model with forward looking price setting is used as an illustration suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities objective to smooth interest rate movements as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon

nominal income targeting in an open economy optimizing model abstract this paper presents simulation results regarding the performance of nominal income targeting a monetary policy rule that sets interest rates in response to deviations of nominal gdp growth from a target path the macroeconomic model is one in which agents solve dynamic optimization problems with rational expectations but in an environment with slow price adjustments in the present version consumption choices reflect habit formation and the economy is open to international flows of goods and securities when calibrated to quarterly us data the model s results suggest that nominal income targeting performs well in relation to inflation targeting and taylor rules

the overvaluation of sterling since 1996 how the policy makers responded and why a large and sustained nominal appreciation in 1996 8 led to a serious and continuing overvaluation of sterling which has been associated with severe pressure on the manufacturing sector the policy makers had difficulty in understanding past and forecasting future movements of sterling they considered but rejected suggestions for foreign exchange market intervention and suggestions that interest rates should be set differently to reduce the overvaluation and relieve pressure on the tradable goods sector one reason was that the exchange rate might react to such decisions in an erratic way but if that is so the monetary framework needs to be revisited

simple monetary policy rules and exchange rate uncertainty abstract we analyze the performance and robustness of some common simple rules for monetary policy in a new keynesian open economy model under different assumptions about the exchange rate model adding the exchange rate to an optimized taylor rule that responds to cpi inflation gives only small improvements in terms of economic stability in most model configurations the taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation our results thus indicate that the taylor rule is sufficient to stabilize a small open economy also under exchange rate model uncertainty

monetary policy rules macroeconomic stability and inflation a view from the trenches i estimate a forward looking monetary policy reaction function for the federal reserve for the periods before and after paul volcker s appointment as chairman in 1979 using information that was available to the fomc in real time from 1966 to 1995 the results suggest broad similarities in policy and point to a forward looking approach to policy consistent with a strong reaction to inflation forecasts during both periods this contradicts the hypothesis based on analysis with ex post constructed data that the instability of the great inflation was the result of weak fomc policy responses to expected inflation a difference is that prior to volcker s appointment policy was too activist in reacting to perceived output gaps that retrospectively proved overambitious drawing on contemporaneous accounts of fomc policy i discuss the implications of the findings for alternative explanations of the great inflation and the improvement in macroeconomic stability since then

optimal horizons for inflation targeting abstract in this paper we investigate the problem of selecting an optimal horizon for inflation targeting in the united kingdom since there are two key ways of thinking about an optimal horizon we look at optimal horizons for both of these interpretations in addition to see whether our results are robust in the face of model uncertainty we compute optimal horizons for two different models with divergent structural and dynamic characteristics

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

optimal taxation of car ownership car use and public transport insights derived from a discrete choice numerical optimization model in this paper we study the taxation of car ownership car use and public transport in the presence of externalities within the framework of a discrete continuous choice model we first derive optimal taxes in a simplified setting emphasizing the specific role of fixed car ownership taxes and the relevance of public transport demand by non car owners for the optimal tax structure a numerical optimisation model is then constructed to study welfareoptimal public transport fares and two part tariffs on ownership and use of gasoline and diesel cars in belgium results are as follows first we find that the current differences in tax treatment between diesel and gasoline car ownership and use cannot be justified on the basis of external cost and budgetary considerations efficient pricing requires substantial increases in the relative user tax on diesel cars as compared to gasoline cars optimal fixed taxes are substantially below current levels and only marginally differ between car fuel types second if for political or technical reasons variable car taxes cannot be optimally adjusted large differences in fixed car taxes do result the same holds if the government uses kilometre taxes as the main variable tax instrument third the results of a series of marginal tax reform exercises suggest that a shift form gasoline towards diesel taxation is welfare improving both for fixed and variable taxes somewhat surprisingly a shift from fixed towards variable taxes is not necessarily welfare improving it is for diesel but not for gasoline cars

inflation targeting during asset and commodity price booms the recent global economic crisis originated in the midst of a commodity price boom that had triggered sharp increases in inflation in many world countries the crisis also came in the context of a rally in asset prices and large domestic imbalances in the united states this paper uses a small open economy dynamic stochastic general equilibrum dsge model to design the correct monetary policy response to a protracted supply shock and examines how that response would change when many become credit constrained like in a credit crunch and when spending of those who can still borrow becomes very sensitive to the interest rates because of overleveraging using a version of the model with kalman learning the paper also evaluates the implications of a loss of target credibility showing how rules must be adjusted when the authorities commitment to the inflation target has been eroded the appropriate response to future evolutions of the price of oil including to large downward corrections from the current level is also evaluated copyright 2010 oxford university press

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

solving for optimal simple rules in rational expectations models this paper presents algorithms that solve for optimal simple monetary policy rules in rational expectations models with precommitment and discretion the algorithms are applied to the models in fuhrer j money credit banking 29 1997 214 clarida et al j econ lit 37 1999 1661 and rudebusch econ j 112 2002 402 to examine the efficiency properties of operational policy rules we show that optimized taylor type rules preform well in these models but that aside from the fuhrer moore model this result is sensitive to whether the central bank can respond to current period shocks taylor type rules that are operational in the sense that they do not respond to current period information are found to be highly inefficient in the rudebusch model and in the clarida et al 1999 model

inflation targeting as constrained discretion this paper suggests a simple framework for modeling inflation targeting as constrained discretion although it is widely claimed that inflation targeting has been successful in maintaining low and stable inflation an announcement of an inflation target does not by itself mean that central bankers are precommiting to how they conduct monetary policy in comparison to the assumption of many theoretical studies central banks conduct monetary policy in a discretionary fashion and rarely precommit to a rule in reality therefore the central bank in this paper is modeled as discretionary yet faced with a constraint that an average of future inflation over a certain horizon should be kept on or near the preannounced target level it is natural to add this constraint to the central banker s optimization problem since inflation targeting involves one way or another an evaluation of the performance over a certain horizon so it is argued that the better outcome of inflation targeting does not come from a commitment but from constrained discretion this paper also sheds some light on optimal targeting horizon

second best policies for congestion externalities abstract this is the third in a series of three articles on the topic of congestion externalities we use an urban general equilibrium model to test the efficiency of several second best policies for congestion externalities the most efficient second best policy is a program of land use controls the program generates a welfare gain of 3 38 per household per week a unit tax on commuting is a less efficient policy with a welfare gain of 1 15

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

cordon pricing and land use regulation this study explores the simultaneous imposition of cordon pricing and land use regulations in a continuous and closed monocentric city with homogeneous households results reveal the optimal level of a single cordon toll and its location and the optimal floor area ratio far regulation clarifying what distortions remain in the existence of cordon pricing and far regulation among other results this paper shows that with an optimal cordon toll far regulation should alternate between a minimum and a maximum regulation both inside and outside the cordon line

how forward looking is the fed direct estimates from a calvo type rule we estimate an alternative type of monetary policy rule according to which the central bank targets a discounted infinite sum of expected inflation and output gaps empirical results suggest that the fed has a mean forward horizon of 4 to 8 quarters

inflation persistence and robust monetary policy design this paper examines the performance of optimised interest rate rules when there is uncertainty about a key determinant of the monetary transmission mechanism namely the degree of persistence characterising the inflation process the paper focuses on the euro area and utilises two variants of an estimated small scale macroeconomic model featuring distinct types of staggered contracts specifications which induce quite different degrees of inflation persistence the paper shows that a cautious monetary policy maker is well advised to design and implement interest rate policies under the assumption that inflation persistence is high when there is considerable uncertainty about the prevailing degree of inflation persistence such policies are characterised by a relatively aggressive response to inflation developments and exhibit a substantial degree of inertia

maintaining price stability how long is the medium term using a small estimated forward looking model of the euro area economy this paper analyses the determinants of the optimal monetary policy horizon for maintaining price stability first the optimal policy horizon for a price level objective is generally longer than that for an inflation objective second the policy horizon becomes longer the greater the weight on other objectives like minimising output gap and interest rate variability third the optimal policy horizon is shorter the higher the degree of forward lookingness in the economy and the greater the slope of the phillips curve finally even if society cares only about inflation stabilisation it often pays to give the central bank a price level objective provided the horizon is optimally chosen to be somewhat longer

the value of scarce water measuring the inefficiency of municipal regulations abstract rather than allowing urban water prices to reflect scarcity rents during periods of drought induced excess demand policy makers have mandated command and control approaches primarily rationing the use of water outdoors while such policies are ubiquitous and likely inefficient economists have not had access to sufficient data to estimate their economic impact using unique panel data on residential end uses of water in 11 north american cities we examine the welfare implications of urban water rationing in response to drought using estimates of expected marginal prices that vary both across and within markets we estimate price elasticities specific to indoor and outdoor water use our results suggest that current policies do target water uses that households themselves are most willing to forgo nevertheless we find that rationing outdoor water in cities has costly welfare implications primarily due to household heterogeneity in willingness to pay for scarce water we find that replacing rationing policies with a market clearing drought price would result in welfare gains of more than 29 of what households in the sample spend each year on water

optimal cordon pricing abstract this paper presents a simple spatial model of traffic congestion for a monocentric city to investigate the effects of cordon pricing on trip making and congestion level in each location optimal cordon pricing is obtained as a combination of the cordon location i e distance of the cordon from the cbd and the amount of toll charged there that maximizes the total social surplus in a city under optimal cordon pricing trips originating from locations inside the cordon are under priced those just outside the cordon are over priced and those near the urban fringe are under priced numerical simulations using the parameter values based on japanese data suggest that cordon pricing attains an economic welfare level very close to the first best optimum

the general equilibrium effects of congestion externalities abstract this is the second in a series of three articles on the topic of congestion externalities we use an urban general equilibrium model to compute two types of cities the market equilibrium city in which congestion externalities occur and the optimum city the optimum city has a more dispersed distribution of employment and a more concentrated distribution of residence if the population of the city is fixed the optimum pricing of transportation generates a per capita welfare gain of 3 78 per week if the population of the city is endogenous the internalization of congestion externalities causes the city to grow

bounded interest rate feedback rules in continuous time this paper analyzes the dynamic consequences of interest rate feedback rules in a flexible price model where money enters the utility function two alternative rules are considered based on past or predicted inflation rates the main feature is to consider inflation rates that are selected over a bounded time horizon we prove that if the central bank s forecast horizon is not too long an active and forward looking monetary policy is not destabilizing the equilibrium trajectory is unique and monotonic this is an advantage with respect to active and backward looking policies that are shown to lead to a unique but fluctuating dynamic

transport tax reform commuting and endogenous values of time abstract we consider a model of urban transport with two trip purposes commuting assumed perfectly complementary to labour supply and noncommuting to analyse the effects of transport tax reform on the value of time and marginal external congestion costs higher commuting taxes plausibly reduce time values but higher noncommuting transport prices will typically raise the value of time the intuition for this latter finding is that the reduction in congestion that follows from the tax increase itself raises net wages per hour of work inclusive of commuting time empirical illustrations with belgian data show a potentially large effect of transport tax reform on time values in quite a few of the tax reforms studied traffic levels are reduced but the increase in time values implies that marginal external congestion costs actually increase

malpractice law physicians financial incentives and medical treatment how do they interact abstractthe effects of malpractice law and financial incentives on physicians are typically studied independently this paper shows that to make both positive and normative statements about medical malpractice liability one must consider physicians legal and financial incentives jointly i develop a simple model to show that when treatment is unprofitable at the margin mitigation of liability lowers treatment levels conversely when treatment is profitable mitigation of liability raises them motivated by this simple theoretical framework i analyze the impact of a tort reform in texas that mitigated malpractice liability consistent with the theory the rate of cesarean sections among commercially insured mothers for whom the procedure is considered profitable increased by 2 percentage points relative to the rate of cesarean sections among mothers covered by medicaid for whom the procedure is thought to be unprofitable

targeting inflation by forecast feedback rules in small open economies abstract we argue that in practice the inflation targeting strategy can be approximated by the interest rate responding to the unchanged interest rate forecast of inflation a method is developed to derive unchanged interest rate forecasts in forward looking models and evaluate the performance of the policy rule in an optimizing new keynesian model due to monacelli european central bank working paper series 227 estimated on uk data we find that the policy rule is less prone to generate a determinate rational expectations equilibrium if based on an unchanged interest rate compared to the rule consistent forecast both rules approximate the optimal commitment policy if the central bank attaches sufficient weight to inflation as opposed to output gap stabilization the optimal forecast feedback horizon is close to a year and a half and is largely independent of how much the central bank prefers inflation to output gap stability

do measures of monetary policy in a var make sense no in many vector autoregressions vars monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the u s federal reserve s reaction function furthermore the residuals from these regressions show little correlation across various vars or with funds rate shocks that are derived from forward looking financial markets my results provide a sharp critique of current monetary vars

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

the welfare gains from pricing road congestion using automatic vehicle identification and on vehicle meters it is a widely accepted proposition that there is a general underpricing of auto travel in u s cities auto travel imposes a congestion externality with an efficient peak period level estimated at lo 23t per mile on urban freeways small 1121 2 3 but for most urban auto travel tolls consist almost entirely of the gasoline excise tax at a fuel economy of 15 miles per gallon the auto toll implied by the current high gas tax in the united states of 25e per gallon is only 1 7e per mile this is much too low for most peak period travel and even underprices some off peak travel the purpose of this study is to estimate the welfare gains which are possible under different regimes for imposing higher auto tolls in urban areas the three regimes studied are associated with a higher gas tax and systems called automatic vehicle identification and on vehicle metering the framework for the study is a model of a city whose shape is that of a wedge or pie slice of a circle the model s features include

the environmental impact of highway congestion pricing abstract this article simulates the effects of congestion pricing on emissions of carbon monoxide nitrogen oxide and hydrocarbons for an actual metropolitan highway network traffic is assigned to the network assuming elastic travel demand and endogenous route selection to minimize private or social travel costs simulations price all or part of the network delaware s household travel demand and highway traffic count data calibrate the simulations epa s mobile 5a model predicts that vehicle emissions decrease as much as 10 in aggregate and 30 in highly congested areas benefits from reduced emissions are 15 30 of those from reduced congestion

economics of a bottleneck abstract drawing on vickrey amer econ rev 59 251 261 1969 and subsequent literature this paper provides a thorough economic analysis of the simplest bottleneck model of road congestion with peak load demand in the morning rush hour a fixed number of identical individuals one per car must travel from home to work between which is a bottleneck of given capacity the costs of travel include queuing time and schedule delay time early or late for work the frequency distribution of departure times adjusts so that in equilibrium all individuals have the same travel costs the paper extends the previous literature by examining a coarse toll and solving for optimal capacities the application of congestion tolls can generate efficiency gains by altering the frequency distribution of departure times previous estimates of the efficiency gains from congestion tolling are likely to be substantially downward biased because they have ignored this effect