can we explain inflation persistence in a way that is consistent with the microevidence on nominal rigidity this paper adopts the impulse response methodology to under stand inflation persistence it has often been argued that existing models of pricing fail to explain the persistence that we observe we adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting we also evaluate how far the theories are consistent with recent evidence on price and wage rigidity we find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence but not all the way yet

some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

product introduction decisions in a duopoly abstract in this paper we model a dynamic environment with two firms that fight for share of industry sales and profit in a market with constant size they capture share by repeatedly introducing new products price changes from period to period reflecting each firm s learning we formulate the problem as a repeated game where each player s decision at each period is to introduce a new product we find that in general each firm s frequency of product introductions clockspeed in equilibrium decreases as its fixed product introduction cost increases further we find that a higher rate of manufacturing learning results in a higher clockspeed and in a higher market share and also results in significantly worse profits for the competitor the results underscore the importance of manufacturing expertise in a firm s ability to introduce new products

why does the cyclical behavior of real wages change over time the cyclical behavior of real wages has evolved from mildly countercyclical during the interwar period to modestly procyclical in the postwar era this paper presents a general equilibrium business cycle model that helps explain the evolution in the model changes in the real wage cyclicality arise from interactions between nominal wage and price rigidities and an evolving input output structure

price stability vs output stability tales of federal reserve administrations abstract this study disentangles policy parameters from those describing private sector behavior by simultaneously estimating an empirical model for inflation and output along with a loss function for the last three federal reserve administrations three important results emerge first the federal reserve appears to put more emphasis on price stability than output stability when the entire sample is considered second and more importantly the loss function parameters exhibit structural break at the time paul volcker was appointed chairman the accommodative characteristics of monetary policy were replaced with a more active policy towards controlling inflation finally interest rate smoothing is found to be an important feature of the monetary policymaking process for all three administrations

the ir relevance of real wage rigidity in the new keynesian model with search frictions we explore the role of real wage dynamics in a new keynesian business cycle model with search and matching frictions in the labor market both job creation and destruction are endogenous we show that the model generates counterfactual inflation and labor market dynamics in particular it fails to generate a beveridge curve vacancies and unemployment are positively correlated introducing real wage rigidity leads to a negative correlation and increases the magnitude of labor market flows to more realistic values however inflation dynamics are only weakly affected by real wage rigidity this is because of the presence of labor market frictions which generate long run employment relationships the measure of real marginal cost that is relevant for inflation dynamics via the phillips curve contains a dynamic component that does not necessarily move with real wages

innovations and issues in monetary policy panel discussion martin feldstein 1 chairman alan greenspan s remarks today give us an opportunity to understand his thinking about monetary policy and about the federal reserve s actions during the past 15 years it was a period of substantial accomplishment that no doubt reflects in considerable measure the views of the chairman himself the fed s primary goal price stability has been achieved with inflation down from 4 percent at the end of the 1980 s to about 1 5 percent now the 2 percentage point difference between the interest rate on conventional treasury bonds and on inflation indexed bonds tips shows that financial markets expect inflation will remain at about 2 percent for at least the next decade

real business cycles sticky wages or sticky prices the impact of technology shocks on us manufacturing in this paper we examine empirically the predictions of a range of theoretical models which give a prominent role to technology shocks in explaining business cycles to this end we estimate 4 digit sic industry level var models for us manufacturing using real output the real wage and utilization corrected measures of technology and labor input our results support both sticky wage dge and rbc models over sticky price dge models moreover they cast some doubt on the importance of technology shocks as propulsive mechanism for business cycles at the industry level

technological advancement learning and the adoption of new technology abstract this research focuses attention upon three related issues the persistence of technological progress over time multiple adoption decisions over a long horizon and the impact of production based learning on those decisions we develop a simple economic model for a single product producing firm incorporating continuous technological progress linear product demand linear switching costs and experience based cost reductions a dynamic programming framework is used to evaluate cases where either one or an unlimited number of adoptions are allowed over an infinite horizon both structural and numerical results are presented fundamental results serve to explain several counter intuitive dynamics in the single adoption case faster rates of technological progress as well as growing markets or a steeply sloping demand curve serve to delay adoption while an increased ability to learn may accelerate it when multiple adoptions are allowed the adoption of any particular technology presents a window of opportunity in which future investment will be warranted if for whatever reason this window has passed then maintaining the older technology becomes more attractive than adoption thus seemingly outdated technologies may remain embedded in some settings

monetary policy and real wage cyclicality this article points to the potential role of monetary policy in affecting the degree of real wage cyclicality we show that the degree and direction of real wage cyclicality is determined by the interaction of i the returns to scale in production ii the nature of aggregate shocks and iii monetary policy given that production technology is fairly constant in the short run we suggest that variations in the real wage output covariance depend largely on the combination of the latter two identifying well documented monetary policy phases in six major organization for economic co operation and development oecd countries and accounting for both aggregate demand and supply shocks we provide empirical evidence to support our main theoretical claim

decentralized trading strategic behaviour and the walrasian outcome for a market with a finite number of agents pairwise matching and bargaining it is shown that even when the market is frictionless the equilibrium is not necessarily competitive it depends on the amount of information agents use if their behaviour is conditioned only on the sets of agents present and the time the competitive solution is the unique subgame perfect equilibrium if agents have full information and condition their behaviour on some of it there are also noncompetitive equilibria in which behaviour depends on specific information such as the identity of the trading partner and past events

the signaling effect of raising inflation abstract this paper argues that central bankers should temporarily raise inflation when anticipating liquidity traps to ensure the credibility of otherwise time inconsistent forward guidance policies as stable inflation in normal times either stems from central bankers desire to maintain credibility or from aversion to inflation the private sector is unable to infer the central banker s willingness to follow through on promises from observing stable inflation jeopardizing the efficiency of forward guidance policy we show that this signaling motive can justify temporary deviations of inflation from target well above 2 but also that the low inflation volatility during the great moderation was insufficient to ensure fully efficient forward guidance when needed

does central bank transparency impact financial markets a cross country econometric analysis blinder et al 2001 argues that more open public disclosure of central bank policies may enhance the efficiency of markets we examine this claim by studying for a set of seven industrialized countries whether selected central banks moves toward more open disclosure during the 1990s improved or worsened the predictability of the corresponding national financial markets employing methodologies analogous to campbell and schiller 1991 we find that for all countries the forecasting error has decreased for interest rates on the respective government bonds across most maturity lengths and that the expectations hypothesis has generally performed better at the short end of the yield curve our results also tentatively show that the effects are stronger for central banks that made the move to greater disclosure compared to those banks that resisted increasing the public s information set these findings are consistent with tabellini s 1987 view that central bank secrecy will hinder the smooth functioning of financial markets

technological expectations and adoption of improved technology abstract attention is focused upon the adoption demand rather than the creation supply of new technology which improves from time to time based on the expected flow of technological progress over which the firm demander has no control it must decide either to adopt the current best available technology or to postpone adoption the distinguishing features of the model are that more than one technological innovation is anticipated and expectations about the likelihood of such innovations are revised as time passes since the last innovation our analysis shows that the firm will adopt the current best practice if its technological lag exceeds a certain threshold moreover as time passes without new technological advances it may become profitable to purchase a technology that has been available even though it was not profitable to do so in the past

outsiders at the bank of england s mpc the monetary policy committee mpc of the bank of england which was established in may 1997 consists of five internal and four external members we study the voting record and show that insiders dissent rarely and typically for higher rather than lower rates whereas outsiders dissent more often prefer lower rates and disagree with the majority when economic growth slows moreover their dissents forecast future interest rate changes we show that a model in which outsiders dislike output below potential more than output above replicates the observed voting pattern well

first impressions matter signalling as a source of policy dynamics we provide the first direct empirical support for the importance of signalling in monetary policy by testing two key predictions from a novel structural model first all policymaker types should become less tough on inflation over time and secondly types that weigh output more should have a more pronounced shift voting data from the bank of england s monetary policy committee strongly support both predictions counterfactual results indicate signalling has a substantial impact on interest rates over the business cycle and improves the committee designer s welfare implications for committee design include allowing regular member turnover and transparency regarding publishing individual votes

the effects of macroeconomic news on high frequency exchange rate behavior this paper studies the high frequency reaction of the dem usd exchange rate to publicly announced macroeconomic information emanating from germany and the u s by us ing data sampled at a five minute frequency we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post announcement although the significance of these effects decreases rapidly as the interval over which the post announcement change in exchange rates is increased the direction of the exchange rate response conforms in general with a reaction function interpretation whereby reac tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets further we detect influences of german monetary policy deci sions on the reaction of the exchange rate and also differences between u s and german announcements in the exchange rate reaction time pattern i introduction this paper studies the high frequency reaction of the dem usd exchange rate to macroeconomic information emanating from germany and the u s specif ically we utilize exchange rate data covering the period 1 1 92 to 31 12 94 sam pled at a five minute frequency to investigate how the major monthly macroe conomic releases from these two countries impact the dem usd the infor mation contained in announcements over this three year period is extracted via a set of market expectation series supplied by money market services interna tional mms 1 our analysis improves on previous work in this area in two main respects first our study is conducted using very high frequency data whereas most earlier work has used exchange rate data sampled at a frequency of a number of hours or more this allows us to construct a very precise characterization of

the ups and downs of capitalism ben bernanke is a leading macroeconomist who has contributed extensively to the literature on business cycles monetary policy the role of financial markets in economic fluctuations inflation targeting and the economics of the great depression he is one of the six economists who form the nber business cycle dating committee a group that determines the dates of recessions in the us in this article interview professor bernanke discusses issues relating to the great depression of the 1930s and problems relating to inflation in the latter half of the twentieth century

the response of real wages to unanticipated money growth abstract this paper investigates the response of real wages to unanticipated money growth in the light of equilibrium theories of the business cycle these theories in their main different versions do not deliver a common and unambiguous hypothesis on this issue while some models implu a countercyclical real wage response during monetary cycles others yield the opposite result of a procyclical real wage econometric analysis of annual and quarterly u s data reported in the paper indicates that there is a weak negative real wage response to an unanticipated increase in money growth

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

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

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

individual and collective time consistency this paper reconsiders the strotz pollak problem of consistent planning and argues that a solution to this problem requires a refinement of subgame perfectness such a refinement is offered through an analysis based on greenberg s theory of social situations the properties of this refinement are investigated and illustrated a unifying framework is presented whereby consistent one person planning as a problem of individual time consistency and renegotiation proofness as a problem of collective time consistency are captured through the same general concept

tie breaking in games of perfect information abstract the paper suggests that ties in an extensive form game have strategic implications if they represent credible threats or promises we consider a subset of subgame perfect nash equilibria obtained by breaking ties according to their strategic implications and show that the subset is nonempty for finite extensive form games of perfect information journal of economic literatureclassification number 026

what does the bundesbank target abstract although its primary ultimate objective is price stability the bundesbank has drawn a distinction between its money focused strategy and the inflation targeting approach recently adopted by a number of central banks we show that holding constant the current forecast of inflation german monetary policy responds very little to changes in forecasted money growth we conclude that the bundesbank is much better described as an inflation targeter than as a money targeter an additional contribution of the paper is to apply the structural var methods of b bernanke and i mihov measuring monetary policy working paper no 5145 national bureau of economic research cambridge ma june 1995 to determine the optimal indicator of german monetary policy we find that the lombard rate has historically been a good policy indicator although the use of the call rate as an indicator cannot be statistically rejected

stabilisation policy targets and unemployment in imperfectly competitive economies this paper argues that the rate of equilibrium unemployment depends on the objectives of the central bank in a model where the central bank uses monetary policy to stabilise the economy we show that unemployment and inflation will be lower with an inflation target than with targets for output money or nominal gdp the intuition for this is that the elasticities of demand in both the product and the labour markets are greater when there is an inflation target we show that this leads to a lower mark up of price over marginal cost and makes wages more sensitive to unemployment

crucial issues concerning central bank independence abstract this paper argues first that it is inappropriate to presume that central banks will in the absence of any tangible precommitment technology inevitably behave in a discretionary fashion that implies an inflationary bias furthermore there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it several implications are discussed

monetary policy responses and strategic price setting abstract this paper shows that the systematic component of monetary policy is a potential determinant of the degree of strategic complementarity among its wider implications this result also points to an important interaction between the systematic and irregular components of monetary policy

an overhaul of doctrine the underpinning of uk inflation targeting this paper argues that the inflation targeting regime prevailing in the united kingdom is not the result of a change in policymaker objectives by conducting an analysis of u k policymakers that parallels romer and romer s 2004 study of federal reserve chairmen i demonstrate that policymaker objectives have been essentially unchanged over the past five decades instead the crucial underpinning of u k inflation targeting has been an overhaul of doctrine a changed view of the transmission mechanism this overhaul can be understood in terms of changes in policymakers views on the values of a few key parameters in their specifications of the economy s is and phillips curves specifically the changed views pertain to the issues of whether interest rates enter the is equation and the extent of policymaker influence on those rates whether the level of the output gap appears in the phillips curve when the gap is negative and whether a speedlimit term matters for inflation dynamics contrary to conventional wisdom changing views on the expected inflation term in the phillips curve do not play a role

a simple empirical measure of central banks conservatism in this paper we suggest a simple empirical and model independent measure of central banks conservatism based on the taylor curve this new indicator can easily be extended in time and space whatever the underlying monetary regime of the considered countries we demonstrate that it evolves in accordance with the monetary experiences of 32 oecd member countries from 1980 and is largely equivalent to the model based measure provided by krause mendez southern economic journal 2005 we finally bring forward the interest of such an indicator for further empirical analysis dealing with the preferences of central banks

changes in uk monetary policy rules and discretion in practice abstract in october 1992 following sterling s departure from the exchange rate mechanism britain adopted a new framework for monetary policy that comprised two components first an explicit target for inflation and second institutional changes designed to give greater influence to the bank of england by increasing the transparency and openness of the process by which interest rates are set this paper analyses those changes from the perspective of the debate on rules versus discretion and argues that an appropriate design of institutional arrangements can provide incentives for central bankers to pursue the first best state contingent monetary policy

monetary policy in the uk the authors argue that the institutional dimension of the bank of england monetary policy and the role the uk hm treasury assumes in this framework are both firmly based on the new consensus in macroeconomics ncm this is also the theoretical framework upon which the inflation targeting element of monetary policy is firmly based this paper discusses these aspects of uk monetary policy and then assesses the policy that has been pursued since 1997 with some reference made to the period between 1992 and 1997 when a version of the framework was introduced the strategy has been successful in terms of keeping uk inflation rates within the targets set by hm treasury however a number of problematic issues are highlighted and discussed

robust monetary policy with competing reference models abstract the existing literature on robust monetary policy rules has largely focused on the case in which the policymaker has a single reference model while the true economy lies within a specified neighborhood of the reference model in this paper we show that such rules may perform very poorly in the more general case in which non nested models represent competing perspectives about controversial issues such as expectations formation and inflation persistence using bayesian and minimax strategies we then consider whether any simple rule can provide robust performance across such divergent representations of the economy we find that a robust outcome is attainable only in cases where the objective function places substantial weight on stabilizing both output and inflation in contrast we are unable to find a robust policy rule when the sole policy objective is to stabilize inflation we analyze these results using a new diagnostic approach namely by quantifying the fault tolerance of each model economy with respect to deviations from optimal policy

pitfalls of forward looking monetary policy a distinctive feature of the procedures recently adopted by inflation targeting central banks is their forward looking character forecasts of the economy s future evolution conditional upon alternative policies play a central role in the banks deliberations to an extent that the procedures adopted are sometimes characterized as forecast targeting this emphasis upon the future consequences of policy is unsurprising in an approach that tries to maintain as transparent as possible a relation between the banks9 decisions and the ultimate goals of monetary policy after all current decisions can still affect the future but not the past nonetheless common descriptions of how inflation targeting is or should be practiced go too far in proposing purely forward looking procedures i shall argue instead that an optimal framework for the conduct of monetary policy must generally be history dependent in ways

communication by central bank committee members different strategies same effectiveness the paper assesses the communication strategies of the federal reserve the bank of england and the european central bank and their effectiveness we find that the effectiveness of communication is not independent from the decision making process the paper shows that the federal reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision making while the bank of england is using a collegial communication strategy and highly individualistic decision making the european central bank ecb has chosen a collegial approach both in its communication and in its decision making assessing these strategies we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the federal reserve and the ecb this suggests that there may not be a single best approach to designing a central bank communication strategy

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

determining output and inflation variability are the phillips curve and the monetary policy reaction function responsible i introduction the natural rate hypothesis that no long run trade off exists between inflation and unemployment has won over most macroeconomists a new trade off between the variability of inflation and the variability of output has lately attracted considerable attention instead of minimizing a weighted sum of the levels of inflation and unemployment the central bank s objective function minimizes a weighted sum of the variances of inflation and output given this loss function for the central bank a great deal of theoretical research has been undertaken as to which type of monetary policy rule is both efficient and robust clarida et al 1999 and an edited volume by taylor 1999b investigate various monetary policy rules in this article i explore the determinants of inflation and output variability first in a theoretical study i present the theoretical studies of taylor 1994 svensson 1997 and ball 1999a and investigate how the policy parameters in a taylor monetary policy reaction function are related to the variability of output and inflation computational experiments show that first as monetary policy makers increase their degree of responsiveness to inflation the variability of inflation falls but the variability of output increases second if policy makers increase their policy response to output gaps the variances of both inflation and output decrease in addition the experiments illustrate that the changes in the variability of output and inflation can be the result of changes in the responsiveness of prices to output gaps the second part of the article provides cross country evidence regarding the relationship of inflation and output variability to both the policy parameters of the monetary policy reaction function and the slope parameter of the phillips curve by analyzing data from 20 organisation for economic cooperation and development oecd countries this study estimates the parameters of the monetary policy reaction function and the slope parameter of the phillips curve and examines the relationships between the estimated parameters and the variability of output and inflation although there have been numerous empirical investigations of monetary policy reaction functions taylor 1999a clarida et al 2000 among others there is very little empirical evidence concerning a relationship between the parameters in the policy reaction function and the variability of output and inflation for several countries furthermore there is even less empirical literature that considers the relationship between the policy parameters and output and inflation variability in a cross country framework this study attempts to extend the empirical analysis to a group of countries by using international data 1 there are two main findings first inflation will be low and stable in countries where the monetary policy rule has large reaction coefficients and second output will have large fluctuations in countries where the phillips curve is relatively flat 2 the rest of this article is divided up into four sections section ii provides an overview of the taylor svensson ball tsb model the relationship between the model s parameter values and inflation and output variability is explored through simulations section iii describes the empirical data for the 20 oecd countries and reports the estimated parameters of the tsb model section iv presents the results of the cross country regressions used to evaluate the determinants of inflation and output variability finally section v offers conclusions ii the tsb model assumptions the tsb model describes the economy in three equations 1 sub t beta i sub t 1 pi sub t 1 r sup lambda sub t 1 u sub t 2 pi sub t pi sub t 1 alpha sub t 1 e sub t 3 i sub t pi

do markets care who chairs the central bank this paper assesses the effects of central bank governor appointments on financial market expectations of monetary policy to measure these effects we assemble a new dataset of appointment announcements from 15 countries and conduct an event study analysis on exchange rates bond yields and stock prices our main findings are threefold first exchange rates and bond yields display a statistically significant response to the announcement of a new governor especially when the appointee s identity was not anticipated in advance second the reactions are especially pronounced for central banks lacking either independence or a clear nominal anchor third new governors are not generally perceived to lack credibility there is no tendency for announcements to be associated with jumps in inflation expectations

identifying sources of macroeconomic and exchange rate fluctuations in the uk abstract using quarterly data for the period 1985 1 2011 1 this paper uses a stylised open economy structural var model to identify the types of shocks responsible for macroeconomic fluctuations in the uk economy the stylised model implies a set of short run restrictions that allow for the identification of the shocks the importance of each shock is determined by examining forecast error variance decompositions impulse response functions and implied long run or permanent effects the results presented here imply that two shocks called the technology and is shocks are relatively more important than other shocks monetary shocks do exhibit long run monetary neutrality but clearly monetary policy is not responsible for a meaningful share of output and employment fluctuations during the sample period the estimated var and structural disturbances imply that the model accurately reflects the uk economy there is little evidence of a price puzzle or an exchange rate puzzle evidence against uncovered interest rate parity in response to an unexpected monetary policy tightening

mcis and monetary policy abstract several central banks have recently adopted a monetary conditions index mci to guide monetary policy under floating exchange rates this paper discusses some analytical and practical questions raised by mcis furthermore using data for australia canada and new zealand which all operate monetary policy under floating rates and with an inflation target it estimates the responses of the central banks to exchange rate changes the results reveal clear differences between central banks while the reserve bank of australia does not appear to respond the bank of canada and the reserve bank of new zealand who use the mci as an operating target do respond quite strongly to movements in the exchange rate

on targeting frameworks and optimal monetary policy we show that speed limit policy a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap consistently outperforms flexible inflation targeting and flexible price level targeting in empirical medium scale dsge models under discretionary policymaking in contrast to small scale new keynesian models this welfare ranking of the targeting frameworks is not overturned when inflation dynamics are mostly backward looking importantly the performance of the speed limit policy shows less sensitivity to its parameterization than other frameworks that target the inflation rate or the price level

nominal wage stickiness and aggregate supply in the great depression building on earlier work by eichengreen and sachs we use data for 22 countries to study the role of wage stickiness in propagating the great depression recent research suggests that monetary shocks transmitted internationally by the gold standard were a major cause of the depression accordingly we use money supplies and other aggregate demand shifters as instruments to identify aggregate supply relationships we find that nominal wages adjusted quite slowly to falling prices and that the resulting increases in real wages depressed output these findings leave open the question of why wages were so inertial in the face of extreme labor market conditions

technology adoption with uncertain future costs and quality in this paper we study the impact of uncertainty about future innovations in quality and costs on consumers technology adoption decisions we model the uncertainty in the technology s quality and costs as a markov process and consider three models of the adoption decision the first model assumes that consumers do a simple net present value npv analysis that compares the npv of adopting to that of not adopting without considering the possibility of waiting the second model is a stochastic dynamic program that considers the possibility of waiting and views the adoption decision as a one time event i e the consumer will only make a single purchase the only question is when the third model allows repeat purchases so the consumer may upgrade by purchasing new versions of the technology whenever it suits her we study structural properties of these models e g the following what changes in qualities and costs will make the consumer better off what changes will encourage adoption we will see that the simple npv and single purchase model have many intuitive properties with the right notion of improvements and reasonable assumptions about the technology changes we find that improvements in the technology make the consumer better off and encourage adoption here improvements are defined using a partial order on quality and cost pairs the results are more complicated in the repeat purchase model under the same conditions on technology changes technology improvements will make the consumer better off however except for special cases of transitions these improvements may make the consumer better off and discourage adoption

macroeconomic stability and the preferences of the fed a formal analysis 1961 98 the rate of inflation in the u s has declined from an average of 4 5 in the period 1960 79 to an average of 3 6 in 1980 98 between those two periods the standard deviations of inflation and the output gap have also declined these facts can be attributed to the interaction of three possible factors a shift in central bank preferences a reduction in the variability of aggregate supply shocks and a more efficient conduct of monetary policy in this paper we identify the relative roles of these factors our framework is based on the estimation of a small structural macro model for the u s economy jointly with the first order conditions which solve the intertemporal optimization problem faced by the fed overall our results indicate that the policy preferences of the fed and in particular the implicit inflation target have changed drastically with the advent of the volcker greenspan era in addition we find that the variance of supply shocks has been lower and monetary policy has been conducted more efficiently during this period

why have aggregate skilled hours become so cyclical since the mid 1980 s this paper documents and discusses a dramatic change in the cyclical behavior of aggregate hours worked by individuals with a college degree skilled workers since the mid 1980 s using the cps outgoing rotation data set for the period 1979 1 2003 4 we find that the volatility of aggregate skilled hours relative to the volatility of gdp has nearly tripled since 1984 in contrast the cyclical properties of unskilled hours have remained essentially unchanged we evaluate the extent to which a simple supply demand model for skilled and unskilled labor with capital skill complementarity in production can help explain this stylized fact within this framework we identify three effects which would lead to an increase in the relative volatility of skilled hours i a reduction in the degree of capital skill complementarity ii a reduction in the absolute volatility of gdp and unskilled hours and iii an increase in the level of capital equipment relative to skilled labor we provide empirical evidence in support of each of these effects our conclusion is that these three mechanisms can jointly explain about sixty percent of the observed increase in the relative volatility of skilled labor the reduction in the degree of capital skill complementarity contributes the most to this result

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

managing a product family under stochastic technological changes abstract this paper characterize a decision framework by which a firm can manage generational product replacements under stochastic technological changes first we characterize an optimal threshold based product replacement policy that maximizes the firm s expected total profit for a finite planning horizon with this policy the firm should optimally replace its current product when the performance gap of the product is above a threshold upon each product replacement we also show that the firm should adopt the latest technology for the new product second using stochastic ordering concepts we quantify the negative impact from the accelerated technological changes on the expected total profit finally we provide an analytical example based on a consumer choice model and characterize a technology follower s joint product replacement and pricing decisions upon the arrival of each innovation from a technology leader

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

inflation zone targeting abstract we study optimal monetary policy design in a simple model that deviates from the linear quadratic paradigm and provides a rationale for the practice of inflation zone targeting we show that the presence of either zone quadratic preferences or a zone linear relationship between inflation and economic activity provides strong incentives to deviate from conventional linear policies we calibrate the model based on parameters for the united states and the euro area and employ a numerical dynamic programming algorithm to derive the optimal policies with this algorithm we examine the role of uncertainty model structure and relative preference towards economic stability in determining the width of the implied targeted inflation zone

caution and conservatism in the making of monetary policy does society benefit from the delegation of monetary policy to cautious and conservative central bankers we offer a critical view on the delegation literature and relax seemingly innocuous assumptions about uncertainty and preferences first caution improves credibility but does not obviate the need for central bank conservatism second previous models of delegation have focused on suboptimal forms of conservatism we derive optimal concepts of conservatism that mitigate or eliminate any residual problem of credibility third we rationalize why credible monetary policy may be conducive to stable inflation and output

demand and supply shocks in italy an application to industrial output abstract we investigate the impact of three different kinds of disturbances on industrial output in italy they originate respectively in aggregate demand technology and the labour supply we first illustrate the theoretical restrictions which permit identification of the three shocks then econometric identification is achieved by extending the blanchard and quah 1989 the american economic review 79 pp 655 673 procedure to a multivariate case our main conclusion is that output variability is significantly affected by technological shocks at all frequencies labour supply disturbances are also relevant while demand shocks have a minor impact on the series although they act in the expected direction therefore the short run behaviour of industrial production is largely explained by supply side shocks

monetary policy and market interest rates this thesis contains four chapters each of which examines different aspects of the uncertainty facing monetary policymakers monetary policy and market interest rates investigates how interest rates set on financial markets respond to policy actions taken by the monetary authorities the reaction of market rates is shown to depend crucially on market participants interpretation of the factors underlying the policy move these theoretical predictions find support in an empirical analysis of the u s financial markets predicting monetary policy using federal funds futures prices examines how prices of federal funds futures contracts can be used to predict policy moves by the federal reserve although the futures prices exhibit systematic variation across trading days and calendar months they are shown to be fairly successful in predicting the federal funds rate target that will prevailafter the next meeting of the federal open market committee from 1994 to 1998 monetary policy with uncertain parameters examines the effects of parameter uncertainty on the optimal monetary policy strategy under certain parameter configurations increasing uncertainty is shown to lead to more aggressive policy in contrast to the accepted wisdom should central banks be more aggressive examines why a certain class of monetary policy models leads to more aggressive policy prescriptions than what is observed in reality these counterfactual results are shown to be due to model restrictions rather than central banks being too cautious in their policy behavior an unrestricted model taking the dynamics of the economy and multiplicative parameter uncertainty into account leads to optimal policy prescriptions which are very close to observed federal reserve behavior

transmission of u s monetary policy to europe and asymmetry in the european monetary system abstract this paper deals with the issues of the transmission of interest rates changes from the united states to europe and of the degree of asymmetry of the european monetary system i e of the extent of german leadership in determining the monetary policy of the ems zone if the transmission from the u s and the asymmetry of the ems are strong countries like france have almost no degree of freedom since both the short term and long term interest rates result from foreign influences and policies the authors try to answer those questions by estimating a model for the determination of the short term and long term interest rates in france and germany and of the dm exchange rate it appears that the assumption of asymmetrical functioning of the ems is confirmed that the dependence of long term rates on short term rates is weak in european countries and that the overall impact of changes in u s interest rates on european rates is limited

inflation targeting regimes abstract this paper divides the monetary frameworks of countries that use an inflation target to define their monetary framework into three different regimes i full fledged inflation targeting ii implicit price stability anchor and iii inflation targeting lite the regimes are differentiated by the clarity and credibility of the commitment to the inflation target the revealed preference for different regimes is related empirically to cross country structural differences in economic and financial development policy implications of moving from one regime to another are drawn especially for emerging market countries aiming at full fledged inflation targeting

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

inflation targeting as a means of achieving disinflation in this paper we take an analytical approach to examine possible adverse effects of the use of inflation targeting as a disinflation regime the idea is that a strict interpretation of an inflation target may preserve inflationary distortions after price stability is attained we show that such a policy not only creates a slump in output but may increase macroeconomic volatility substantially in a model in which wages are subject to a taylor staggering structure

staggered price setting staggered wage setting and business cycle persistence abstract staggered price setting and staggered wage setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks in this paper we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework we show that although the dynamic price setting and wage setting equations are alike a key parameter governing persistence is linked to the underlying preferences and technologies in different ways with reasonable parameter values the staggered price mechanism by itself is incapable of while the staggered wage mechanism plays an important role in generating persistence

on optimal replacement thresholds with technological expectations abstract y balcer and s a lippman 1984 j econ theory34 292 318 develop a model to analyze the buy or wait problem under technological change they show that this dynamic problem has a threshold solution if the difference between the best available technology and that currently held exceeds a certain threshold then buy they also claim that the threshold is increasing in the discovery potential that is the faster the technology is changing the higher the threshold in this note we point out an error in the proof of that theorem and further we provide a numerical counterexample to the claim journal of economic literature classification numbers o32 o33

real wages and the business cycle the objectives of this review are threefold 1 to characterize the empirical literature on the cyclical behavior of real wages 2 to identify the sources of the differences in results across studies and 3 to enumerate key factors that determine the cyclicality of real wages given a host of measurement and methodological issues drawing firm conclusions is difficult but several generalizations can be made the estimated cyclicality of real wages depends crucially on the time period of analysis and the choice of whether to examine the production or the consumption wage composition effects play an important but complicated role as well

the high frequency impact of news on long term yields and forward rates is it real abstract macroeconomic news announcements move yields and forward rates on nominal and index linked bonds and inflation compensation this paper estimates the reactions using high frequency data on nominal and index linked bond yields allowing the effects of news announcements on real rates and inflation compensation to be parsed far more precisely than is possible using daily data long term nominal yields and forward rates are very sensitive to macroeconomic news announcements inflation compensation is sensitive to announcements about price indices and monetary policy however for news announcements about real economic activity such as nonfarm payrolls the vast majority of the sensitivity is concentrated in real rates accordingly most of the sizeable impact of news about real economic activity on the nominal term structure of interest rates represents changes in expected future real short term interest rates and or real risk premia rather than changes in expected future inflation and or inflation risk premia such sensitivity of real rates to macroeconomics news is hard to rationalize within the framework of existing macroeconomic models

the relative stickiness of wages and prices i introduction a continuing challenge to macroeconomics is to explain how a purely nominal disturbance produces short term aggregate real effects in the classical paradigm in which wages and prices are perfectly flexible a positive nominal aggregate demand disturbance will cause nominal wages and output prices to rise in the same proportion leaving real wages unchanged thus neither employment nor output will be affected consequently many business cycle theories posit the existence of wage and or price stickiness to explain how nominal aggregate demand disturbances generate real macroeconomic effects according to these theories the failure of nominal wages or prices to fully adjust in the short run to purely nominal disturbances explains why shocks to aggregate demand will cause both employment and output to temporarily deviate from their natural rates the relative importance of wage and price stickiness in the transmission of nominal shocks to the real economy however remains an unsettled issue the purpose of this paper is to exploit evidence on the behavior of real wages in an attempt to assess the relative importance of these two sources of stickiness first consider models emphasizing sticky or slowly adjusting nominal wages 1 if for example output prices are free to adjust but nominal wages are sticky a positive aggregate demand shock will cause prices to rise and real wages to temporarily fall below market clearing levels the fall in real wages will stimulate employment and thus output as the aggregate demand shock induces movement along a stable labor demand curve consequently sticky wage models predict a negative correlation between aggregate demand shocks and real wages if on the other hand wages are flexible while output prices are sticky 2 aggregate demand disturbances and real wages will tend to be positively correlated in the short run in sticky price models imperfectly competitive firms may resist adjusting output prices in response to changes in demand perhaps due to menu costs instead increases in demand are met by corresponding increases in output this requires an increase in labor inputs which in turn requires an increase in the real wage rate if wages are flexible and the labor supply curve is positively sloped thus when prices are sticky but wages are flexible a positive aggregate demand shock is associated with an increase in real wages it may be that neither prices nor wages are fully flexible if prices and wages both exhibit stickiness we would expect real wages to be positively correlated or negatively correlated with aggregate demand shocks depending in large part on whether prices or wages are stickier thus knowledge of the direction of the short run response of real wages to aggregate demand disturbances would offer important evidence on the relative stickiness of nominal wages and output prices if all business cycle fluctuations are due solely to aggregate demand disturbances such evidence could be obtained by examining the cyclical behavior of real wages since regardless of the source of stickiness aggregate demand disturbances are positively correlated with employment and output countercyclical procyclical real wages would indicate that nominal wages are stickier more flexible than output prices indeed some consider the stylized fact of slightly procyclical real wages 3 to be an important challenge to models that emphasize wage stickiness for example bennett mccallum 1986 argues for the superiority of models with sticky output prices since if wage stickiness alone were responsible for the real effects of monetary actions with product prices adjusting flexibly then we should observe countercyclical movements in the real wage that we do not has recently been reconfirmed in a study by bils 1985 gregory mankiw 1987 107 has concluded the final and perhaps most serious problem with the unadorned nominal wage story is that real wages do not move over the business cycle as the theory predicts

does exchange rate control improve inflation targeting in emerging economies abstract we investigate the role of exchange rates in inflation targeting emerging economies we give strong evidence that hybrid inflation targeting frameworks where exchange rate is managed deliver a stronger nominal anchor as they show better resistance to the 2007 2008 inflation shock

decomposing real and nominal yield curves abstract inflation indexed and nominal yield curves capture investors expectations of real short rates and inflation as well as their required compensation for bearing liquidity inflation and real interest rate risk we estimate an affine term structure model that allows us to decompose real and nominal bond yields into these components and use the model to study the transmission of monetary policy the model decompositions imply that the federal reserve s announcements of lsaps lowered yields primarily by reducing real term premia changes in real term premia also account for the strong response of long term real forward rates to federal funds rate surprises

a cross country comparison of the cyclicality of real wages this paper contains the first cross country comparison of the cyclical behaviour of real wages using microdata after controlling for changes in labour quality i find that real wages are strongly procyclical in canada the united kingdom and the united states in contrast the cyclicality of government published real aggregate hourly wages varies substantially across these three countries the disparity suggests that a direct comparison of the cyclical behaviour of real aggregate wages is misleading finally i show that variations in labour quality also bias the cross country correlation of several key labour market variables jel classification j3 e3 une comparaison transversale entre pays du caractere cyclique des salaires reels ce memoire presente la premiere comparaison entre pays du comportement cyclique des salaires reels a l aide de micro donnees apres normalisation pour tenir compte des changements dans la qualite du travail cette etude montre que les salaires reels sont pro cycliques au canada au royaume uni et aux etats unis au contraire le caractere cyclique des donnees sur les salaires horaires agreges varie substantiellement entre ces trois pays cette disparite suggere qu une comparaison directe du comportement cyclique des salaires reels agreges peut etre trompeuse finalement cette etude montre que les variations dans la qualite du travail biaisent aussi les correlations entre pays de plusieurs variables du marche du travail

monetary policy rules under heterogeneous inflation expectations this paper evaluates the role of inflation forecast heterogeneity in u s monetary policymaking the deviation between private and central bank inflation forecasts is identified as a significant explanatory factor behind the fed s monetary policy decisions a discretionary policy rule that includes the forecast deviation as an additional argument is estimated empirically for the period 1975 2009 covering the chairmanships of arthur burns george miller paul volcker alan greenspan and the beginning of ben bernanke s term by using inflation forecasts obtained from the federal open market committee s greenbook and the survey of professional forecasters and real time estimates of the output gap the estimated rule appears to provide a consistent description of the fed s policy during the sample period presenting an alternative perspective regarding the key drivers of the high inflation phase in the 1970s as well as of the successful volcker disinflation in the early 1980s and the gradual transition to a regime of lower inflation and high policy credibility that has increasingly characterized monetary policy over the past two decades jel e50 e52 e58

in search of a stylised fact do real wages exhibit a consistent pattern of cyclical variability the paper surveys the studies on the cyclical behaviour of real wages published from the twenties onwards the traditional simple neoclassical model of the labour market suggests that real wages tend to move countercyclically however from a theoretical viewpoint there are few reasons to expect this behaviour once the simple model is extended to account for imperfect competition uncertainty lagged responses or contracting between firms and workers empirical studies give different answers to the problem the contributions reviewed in the paper are arranged roughly in a chronological order the interwar period the postwar pre econometric studies the econometric work using aggregate data the evidence produced on the basis of longitudinal data the analyses of the shock responsiveness of real wages and finally the most recent papers attempting a reconciliation of the somewhat conflicting evidence derived from aggregate and panel data

event studies in economics and finance the event study is an important research tool in economics and finance the goal of an event study is to measure the effects of an economic event on the value of firms event study methods exploit the fact that given rationality in the marketplace the effects of an event will be reflected immediately in security prices thus the impact can be measured by examining security prices surrounding the event in this paper event study methods are described including some of the potential complications an example is included to illustrate the approach

should inflation targeting central banks respond to exchange rate movements abstract this paper examines whether it is optimal for inflation targeting central banks to respond to exchange rate movements the paper finds that exchange rate movements can provide a signal on the developments in the economy that the central bank cannot perfectly observe the results suggest that when the degrees of exchange rate pass through and international financial integration are high it is optimal for the central bank to pay more attentions to exchange rate movements these results however depend on two conditions 1 the ability of the central bank to observe the true exchange rate process and 2 the number of real frictions in the model economy

the performance of forecast based monetary policy rules under model uncertainty we investigate the performance of forecast based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics we identify the key characteristics of rules that are robust to model uncertainty such rules respond to the one year ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia in contrast rules with longer forecast horizons are less robust and are prone to generating indeterminacy in light of these results we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences

what matters when the impact of ecb communication on financial market expectations this article analyses financial markets reaction to european central bank s ecb communication we apply a novel indicator that quantifies the contents of the ecb s introductory statements and allows disentangling ecb statements on prices the real and the monetary sector we provide evidence that it matters what issue the ecb is speaking about especially the ecb s statements on price developments represent important news to financial markets it also matters when the ecb affects markets communication drives maturities above 4 months