learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

ppp exchange rate rules macroeconomic in stability and learning in order to maintain competitiveness governments in developing economies seem to have pursued purchasing power parity ppp exchange rate rules by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target this article shows that these rules are likely to induce macroeconomic instability as they generate sunspot driven fluctuations that are in fact learnable by agents in the expectational stability sense it finds that the existence of these learnable sunspots depends among others on open economy features including the degree of openness and the degree of exchange rate pass through to consumer s import prices

eaere award for the best paper published in environmental and resource economics during 2019 we present details of the eaere award for the best paper published in environmental and resource economics during 2019 together with those highly commended papers published during this period

consumption externalities and monetary policy with limited asset market participation this article explores the interaction between consumption externalities and limited asset market participation lamp in the standard new keynesian model we assess the performance of simple taylor type interest rate rules with respect to a equilibrium determinacy b the model s ability to simultaneously generate output and inflation volatility similar to the pre volcker era and c the model s response to a technology shock we find that when individual preferences are affected by average household consumption aggregate consumption externality stronger externalities increase the range of lamp for which multiple equilibria arise even if the policy rule satisfies the taylor principle the interaction of lamp and externalities can generate vast inflation output relative volatility in line with the one observed in the data in the 1970s according to our analysis consumption externalities also affect the responses of endogenous variables to total factor productivity shocks jel e4 e5

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

monetary policy learning and the speed of convergence under the assumption of bounded rationality economic agents learn from their past mistaken predictions by combining new and old information to form new beliefs the purpose of this paper is to investigate how the policy maker by affecting private agents learning process determines the speed at which the economy converges to the rational expectation equilibrium i find that by reacting strongly to private agents expected inflation a central bank increases the speed of convergence and shortens the length of the transition to the rational expectation equilibrium i use speed of convergence as an additional criterion for evaluating alternative monetary policies i find that a fast convergence is not always desirable

performance of monetary policy with internal central bank forecasting abstract recent models of monetary policy have analyzed the desirability of different optimal and ad hoc interest rules under the restrictive assumption that forecasts of the private sector and the central bank are homogeneous this paper studies the implications of heterogeneity in forecasting by the central bank and private agents for the performance of interest rules in a framework of econometric learning

stable near rational sunspot equilibria abstract we introduce a new class of solutions to nonlinear forward looking models called near rational sunspot equilibria nrse nrse are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy and are near rational in that agents use the optimal linear forecasting model when forming expectations generic results for existence and stability under learning are established nrse in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model s minimal state variable solution is e stable nrse are readily computable and our results make it possible to use the standard linear tools to search for stable nrse we illustrate our results using a canonical nonlinear new keynesian model

equilibrium indeterminacy and asset price fluctuation in japan a bayesian investigation this paper investigates sources of asset price fluctuation in japan using an estimated financial accelerator model for explicit treatment of expectational beliefs characterized by sunspots the model is analyzed over the parameter space where the equilibrium can be indeterminate we show that indeterminacy arises if the financial accelerator effect is sufficiently large according to our bayesian estimation results japan s economy was affected by sunspot shocks however the contribution of the sunspots to asset price volatility was low rather net worth and cost shocks drove the asset price fluctuation we find however that the sunspots substantially affected capital investment

evolving monetary fiscal policy mix in the united states a micro founded model that allows for changes in the monetary fiscal policy mix and in the volatility of structural shocks is fit to us post wwii data agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion of the macroeconomy the results show that the 60s and the 70s were characterized by a prolonged period of active fiscal policy and passive monetary policy the appointment of volcker marked a change in the conduct of monetary policy but it took almost ten years for the fiscal authority to start accommodating this regime change

timing and real indeterminacy in monetary models an increasingly common approach to the theoretical analysis of monetary policy is to ensure that a proposed policy does not introduce real indeterminacy and thus sunspot fluctuations into the model economy policy is typically conducted in terms of directives for the nominal interest rate this paper uses a discrete time money in the utility function model to demonstrate how seemingly minor modifications in the trading environment result in dramatic differences in the policy restrictions needed to ensure real determinacy these differences arise because of the differing pricing equations for the nominal interest rate

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

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

monetary policy inertia more a fiction than a fact abstract empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia this evidence is very hard of reconcile with the alternative evidence of low predictability of monetary policy rates in this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by taylor 1993 discretion versus policy rules in practice canergie rochester conference series on public policy 39 195 214 after appropriately diagnosing and taking care of the weak instruments problem we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules

expectations learning and business cycle fluctuations this paper explores an alternative theory based on learning dynamics in the con text of an otherwise standard stochastic growth model we consider an environment in which households and firms have an incomplete model of the macroeconomy knowing only their own objectives constraints and beliefs agents are optimizing have a completely specified belief system but do not know the equilibrium map ping between primitive disturbances the aggregate state of the economy and mar ket clearing prices by extrapolating from historical patterns in observed data they approximate this mapping to forecast variables that are exogenous to their decision problems such as the rental rate of capital and the real wage this belief structure has the property that beliefs affect the true data generating process of the economy which in turn affects belief formation the economy is therefore self referential shifts in beliefs about future returns to labor and capital affect current market clear ing prices which in turn can reinforce beliefs in this environment current prices can become less informative about future economic conditions generating fluctuations in real activity this kind of mechanism driving business cycle fluctuations is found in early writ ings on macroeconomic dynamics for example alfred c pigou 1927 on page 122 writes

collective remittances and the state the 3 1 program in mexican municipalities the mexican 3 1 program for migrants is a grant scheme whereby the municipal state and federal governments match by 3 to 1 the funds that migrant clubs send to their hometowns to finance public projects using municipal level data on program participation for the period 2002 07 we evaluate both the economic bias and the political bias of the program since migration and poverty have a nonlinear relationship we find that poorer municipalities are less likely to participate than those with medium poverty levels we also find that the program rewards pan strongholds rather than competitive municipalities

monopsony with nominal rigidities an inverted phillips curve with nominal wage rigidities it is crucial to distinguish whether wages are set by workers or firms whether we have monopoly or monopsony power this paper provides a model of monopsony power in the labour market and a monopsonistic phillips curve if wages are set by firms who face nominal rigidities and there is inflation firms cannot adjust their wages fully the real wage falls and labour supply hence output decreases this provides a phillips curve where the output gap is negatively correlated with wage inflation in such a world monetary policy affects the intertemporal labour supply while the phillips curve is a labour demand curve interest rate cuts reduce the labour supply instead of boosting demand they are contractionary

estimating dsge models with zero interest rate policy we propose estimating dsge models in which the central bank fixes the policy rate for an extended period of time and apply our approach to estimate expected durations of the federal reserve s zero interest rate policy since 2009 we find a large increase in expected duration in 2011 with the move to calendar based guidance and a decrease in 2013 with the taper tantrum these changes are identified by the influence of expected duration on output inflation and interest rates at longer maturities the structural model measures the severity of the zero lower bound constraint and the effects of unconventional policy

monetary policy stock prices and consumption externalities abstract we study interest rate rules responding to stock prices in a sticky price sticky wage new keynesian framework subject to consumption externalities for given wage rigidity such rules are beneficial to equilibrium determinacy if households preferences feature sufficiently strong keeping up with the joneses externalities

learning monetary policy and asset prices this working paper should not be reported as representing the view s of the imf the views expressed in this working paper are those of the author s and do not necessarily represent those of the imf or imf policy working papers describe research in progress by the author s and are published to elicit comments and to further debate

the value of interest rate stabilization policies when agents are learning we examine the expectational stability e stability of rational expectations equilibrium under optimal interest rate rules in the context of the standard new keynesian model of the monetary transmission mechanism we focus on the case where the monetary authority adds interest rate stabilization to its other objectives of inflation and output stabilization we consider both the case where the monetary authority lacks a commitment technology and as well as the case of full commitment we show that for both cases optimal interest rate rules yield rational expectations equilibria that are e stable for a wide range of empirically plausible parameter values this finding stands in contrast to the findings of evans and honkapohja 2002 2003ab for optimal monetary policy rules in environments where interest rate stabilization is not part of the central bank s objective function

some implications of learning for price stability abstract survey data on expectations of a range of macroeconomic variables exhibit low frequency drift in a new keynesian model consistent with these empirical properties optimal policy in general delivers a positive inflation rate in the long run two special cases deliver classic outcomes under rational expectations as the degree of low frequency variation in beliefs goes to zero the long run inflation rate coincides with the inflation bias under optimal discretion for non zero low frequency drift in beliefs as households become highly patient valuing utility in any period equally the optimal long run inflation rate coincides with optimal commitment price stability is optimal the optimal state contingent response to cost push disturbances similarly reflects properties of optimal discretion and optimal commitment depending on the degree of low frequency variation in beliefs when beliefs exhibit substantial variation in response to short run forecast errors optimal policy is closer to commitment

e stability vis a vis determinacy in regime switching models abstract this paper examines e stability determinacy and indeterminacy in a general class of regime switching models with lagged endogenous variables using determinacy conditions from cho 2016 2020 our first result extends mccallum 2007 to models with time varying parameters the unique mean square stable equilibrium is e stable if agents have current information and one period ahead decision rules further we address the existence of e stable non fundamental equilibria and find that iteratively e stable equilibria of indeterminate switching models can exist finally we show that indeterminate new keynesian models with persistent recurring interest rate peg regimes admit iteratively e stable equilibria in special cases the iterative e stability condition coincides with the long run taylor principle

monetary policy transmission in a model with animal spirits and house price booms and busts abstract can monetary policy trigger pronounced boom bust cycles in house prices and create persistent business cycles we address this question by building heuristics into an otherwise standard dsge model as a result monetary policy sets off waves of optimism and pessimism animal spirits that drive house prices that in turn have strong repercussions on the business cycle we compare our findings to a standard model with rational expectations by means of impulse responses we suggest that a standard taylor rule is not well suited to maintain macroeconomic stability instead an augmented rule that incorporates house prices is shown to be superior

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

monetary fiscal policy interactions and fiscal stimulus abstract increases in government spending trigger substitution effects both inter and intra temporal and a wealth effect the ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption higher future taxes create a strong negative wealth effect while the active monetary response increases the real interest rate this paper estimates markov switching policy rules for the united states and finds that monetary and fiscal policies fluctuate between active and passive behavior when the estimated joint policy process is imposed on a conventional new keynesian model government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized the paper reports the model s predictions of the macroeconomic impacts of the american recovery and reinvestment act s implied path for government spending under alternative monetary fiscal policy combinations

technology shocks and monetary policy assessing the fed s performance abstract the purpose of the present paper is twofold first we characterize the fed s systematic response to technology shocks and its implications for u s output hours and inflation second we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule including the optimal one in the context of a standard business cycle model with sticky prices our main results can be described as follows first we detect significant differences across periods in the response of the economy as well as the fed s to a technology shock second the fed s response to a technology shock in the volcker greenspan period is consistent with an optimal monetary policy rule third in the pre volcker period the fed s policy tended to overstabilize output at the cost of generating excessive inflation volatility our evidence reinforces recent results in the literature suggesting an improvement in the fed s performance

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

inflation determination with taylor rules is new keynesian analysis critically flawed abstract cochrane 2007 has strongly questioned the basic economic logic of current monetary policy analysis arguing that new keynesian nk models imply rational expectations paths with explosive inflation that do not imply explosions in real variables relevant for transversality conditions consequently the usual logic does not rule out solutions with explosive inflation that result does not however justify negative conclusions about nk analysis for a different criterion is logically satisfactory it is that to be plausible a re solution must satisfy the property of least squares learnability adoption of this criterion serves to justify in principle the bulk of current mainstream analysis

learning in a misspecified multivariate self referential linear stochastic model this paper introduces a general method to study stability under learning of equilibria resulting from agents with misspeci ed perceptions of the law of motion of the economy this is done by transforming the actual and perceived laws of motion into the form of seemingly unrelated regressions and then linearly projecting the actual law of motion into the same class as the perceived law of motion i study the new keynesian is lm model with inertia under all possible classes of restricted perceptions it turns out that the results found in bullard and mitra 2002 2003 are robust under misspeci ed expectations

learning and price volatility in duopoly models of resource depletion the aim of this paper is to provide a theoretical model that can account for price fluctuations in depletable resource markets we do so by introducing learning into a hotelling style duopoly model of optimal resource depletion before the depletable resource becomes scarce the self confirming equilibrium of the model mirrors noncooperative rational expectations equilibrium in that supply is high and price is low although learning does induce occasional upward price spikes that are followed by a long period of falling price once the depletable resource becomes scarce the dynamics of the market change significantly with the self confirming equilibrium mirroring the cooperative rather than noncooperative rational expectations equilibrium supply is low and price is high price spikes still occur but against a background of increasing prices when scarcity is sufficient then the market is permanently in a self confirming equilibrium that is equivalent to cooperative rational expectations equilibrium

liquidity traps learning and stagnation we examine global economic dynamics under learning in a new keynesian model in which the interest rate rule is subject to the zero lower bound under normal monetary and fiscal policy the intended steady state is locally but not globally stable large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output to avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation in contrast policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals

policy effectiveness in spatial resource wars a two region model abstract we develop a spatial resource model in continuous time in which two agents strategically exploit a mobile resource in a two region setup to counteract the overexploitation of the resource the tragedy of commons that occurs when players are free to choose where to harvest the regulator can establish a series of spatially structured policies we compare the equilibria in the case of a common resource with those that emerge when the regulator either creates a natural reserve or assigns territorial user rights to the players we show that when technological and preference parameters dictate a low harvesting effort the policies are ineffective in promoting the conservation of the resource and in addition they lead to a lower payoff for at least one of the players conversely in a context of higher harvesting effort the intervention can help to safeguard the resource preventing extinction while also improving the welfare of both players

monetary policy judgment and near rational exuberance we study how the use of judgement or add factors in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods we examine the possibility of a new phenomenon which we call exuberance equilibria i n the new keynesian monetary policy framework inclusion of judgement in forecasts can lead to self fulfilling fluctuations in a subset of the determinacy region we study how policymakers can minimize the risk of exuberance

bad luck bad policy and learning a markov switching approach to understanding postwar u s macroeconomic dynamics abstract this paper evaluates the role of monetary policy in understanding the u s post war macroeconomic fluctuations we construct a medium size dsge model in which the central bank through a real time learning process can make mistakes in estimating key elasticities between macroeconomic aggregates and the central banks objectives may change over time the model also features time varying volatilities of non policy shocks we find that misperceptions of the persistence of inflation and the slope of the phillips curve could affect optimal monetary policy decision making therefore their accurate prediction is key for achieving successful monetary policy outcomes in addition we argue that the monetary policy shift geared toward inflation stabilization in the late 1970s changed the composition of output making the marginal efficiency of investment shock that proxies for the functioning of the financial sector the most important contributor to the business cycle

does the reserve bank of australia follow a forward looking nonlinear monetary policy rule abstractthe conventional monetary policy rule describes a simple linear relationship between the domestic interest rate inflation rate and output gap an important extension to this rule is to inc

productivity growth transparency and monetary policy abstract this study examines whether central bank transparency about views of future productivity growth contributes to stabilizing macroeconomic fluctuations in a standard new keynesian model the central bank and private agents make their subjective estimates on the persistence of productivity growth in this situation if private agents believe that the central bank s projections include forecast errors on future productivity growth these beliefs can destabilize private agents own expectations because the central bank s forecast errors may lead to policy mistakes in the future consequently central bank transparency does not necessarily stabilize the variations of the output gap and inflation rate the central bank should respond strongly to the inflation rate if the impact of transparency is uncertain

fiscal policy in an expectations driven liquidity trap we study the effects of fiscal policy interventions in a liquidity trap in a model with nominal rigidities and an interest rate rule in a liquidity trap caused by a self fulfilling state of low confidence higher government spending has deflationary effects that reduce the spending multiplier when the zero lower bound is binding instead cuts in marginal labor tax rates are inflationary and become more expansionary when the zero lower bound is binding these findings contradict popular views about the effects of fiscal policy in a liquidity trap

another weakness of determinacy as a selection criterion for rational expectations models abstract this paper argues against determinacy as a guide to interpret rational expectations solutions using an example in which a determinate solution exists but differs sharply in dynamic behavior from that implied by the model considered on a sector by sector basis

learning about fiscal policy and the effects of policy uncertainty abstract in this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession the agents in our model are uncertain about the conduct of fiscal policy and act as econometricians by estimating fiscal policy rules that might change over time we find that assuming that agents are not instantaneously aware of the new fiscal policy regime in place leads to substantially more volatility in the short run and persistent differences in average outcomes we highlight issues that can arise when a policymaker wants to announce a policy change from a methodological perspective we introduce a novel way to model learning in the face of discrete policy changes

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

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

regime switches agents beliefs and post world war ii u s macroeconomic dynamics the evolution of inflation and output over the last 50 years is examined through the lens of a micro founded model that allows for changes in the behavior of the federal reserve and in the volatility of structural shocks agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy the results support the view that there were regime switches in the conduct of monetary policy however the behavior of the federal reserve is identified by repeated fluctuations between a hawk and a dove regime instead of by the traditional pre and post volcker structure counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative chairman inflation would not have reached the peaks of the late 70s and the inflation output trade off would have been less severe these beliefs counterfactuals are new in the literature finally the paper provides a bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with markov switching regimes

monetary policy and asset prices with belief driven fluctuations abstract we present a heterogeneous agents new keynesian model subject to a cost channel of monetary policy transmission constant turnover between long time traders and newcomers in market activities combined with restricted trading opportunities introduces a feedback from the stock market to real activity making stock prices non redundant for the business cycle we show that strict inflation targeting can lead to equilibrium indeterminacy even if the policy rule satisfies the taylor principle a belief driven shock to stock price generates relative volatilities of key financial variables which are very close to what is observed in u s data this result hints to the possibility that the financial instability witnessed since the mid to late 1990s was the result of waves of rational exuberance and pessimism in financial markets our analysis suggests that a mild response to stock prices in the central bank s policy rule can restore equilibrium determinacy and therefore rule out non fundamental volatility

consumption habits in a new keynesian business cycle model consumption habits have become an integral component in new keynesian models however consumption habits can be modeled in a host of different ways and this diversity is reflected in the literature i examine whether different approaches to modeling consumption habits have important implications for business cycle behavior using a standard new keynesian business cycle model i show that to a first order log approximation the consumption euler equation associated with the additive functional form for habit formation encompasses the multiplicative function form empirically i show that whether consumption habits are internal or external has little effect on the model s business cycle characteristics

the lucas critique policy invariance and multiple equilibria the lucas critique of econometric policy evaluation argues that the parameters of econometric models are subject to theoretical cross equation restrictions which follow from the fact that the endogenous variables of the models are chosen optimally by forward looking agents in this paper i argue that these facts alone are insufficient to generate such restrictions i present an example of a model in which there exist multiple stationary rational expectations equilibria one of which is supported by a process invariant forecast rule immunity to the lucas critique is proposed as a selection criterion in models with multiple equilibria

interest rate control and nonconvergence to rational expectations this paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest it shows that under general conditions such a policy would produce the well known cumulative process despite the fact that there exists a well behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate the cumulative process shows up as the failure of learning to converge to rational expectations specifically the paper shows first in a conventional is lm model with an expectations augmented phillips curve and then in a micro based finance constraint model that if people follow any learning rule based on experience that satisfies a weak condition then the sequence of temporary equilibria under a policy of interest pegging cannot converge the nonconvergent path that will be observed accords with the familiar cumulative process in that inflation accelerates if the market rate of interest has been pegged below the natural rate

financial factors and monetary policy determinacy and learnability of equilibrium abstract we contribute to the debate on whether central banks should respond to financial factors in monetary policy rules by evaluating equilibrium determinacy and e stability in the presence of a financial accelerator policies responding to lagged asset prices either reduce the region of determinacy or e stability in the parameter space however a response to current asset prices expands both regions of determinacy and e stability policy rules reacting to credit volume constrict the determinacy region most policies responding to credit spreads expand determinacy and e stability regions we favor the inclusion of current asset prices or credit spreads in monetary policy rules

monetary policy indeterminacy and learning abstract forward looking monetary models with taylor type interest rate rules are known to generate indeterminacies with a potential dependence on extraneous sunspots for some structural and policy parameters we investigate the stability of these solutions under adaptive learning focusing on common factor or resonance frequency representations in which the observed sunspot has a suitable time series structure we consider specifications incorporating both lagged and expected inflation in the phillips curve and both expected and inertial elements in the policy rule we find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises

the consequences of an unknown debt target abstract several proposals to reduce u s debt reveal large differences in their targets we examine how an unknown debt target affects economic activity using a real business cycle model in which bayesian households learn about a state dependent debt target in an endogenous tax rule recent papers use stochastic volatility shocks to study fiscal uncertainty in our setup the fiscal rule is time varying due to unknown changes in the debt target households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities three key findings emerge from our analysis 1 limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates 2 the welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households 3 an unknown debt target likely reduced the stimulative effect of the arra and uncertainty about the sunset provision in the bush tax cuts may have slowed the recovery and led to welfare losses

real time rational expectations and indeterminacy abstract this paper uses the technique of lubik and schorfheide lubik t schorfheide f 2004 testing for indeterminacy an application to u s monetary policy the american economic review 94 1 190 217 to test for indeterminacy in a new keynesian model using real time instead of revised data on the output gap the results suggest indeterminacy both before 1979 and after 1982

learning and the great moderation we study a stylized theory of the volatility reduction in the u s after 1984 the great moderation which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of bayesian households attempting to learn the latent state of the economy we use a standard equilibrium business cycle model with technology following an unobserved regime switching process after 1984 according to kim and nelson 1999a the variance of u s macroeconomic aggregates declined because boom and recession regimes moved closer together keeping conditional variance unchanged in our model this makes the signal extraction problem more difficult for bayesian households and in response they moderate their behavior reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy we construct example economies in which this learning effect accounts for about 30 of a volatility reduction of the magnitude observed in the postwar u s data

output persistence from monetary shocks with staggered prices or wages under a taylor rule we analytically examine output persistence from monetary shocks in a dsge model with staggered prices or wages under a taylor rule surprisingly while taylor style staggering never yields persistence calvo style staggering of wages does generate persistence under decreasing returns to labour c 2009 elsevier b v all rights reserved

evolving macroeconomic dynamics in a small open economy an estimated markov switching dsge model for the uk this paper investigates the possibility of shifts in the uk economy using a markov switching open economy dynamic stochastic general equilibrium dsge model we find overwhelming evidence to reject the hypothesis that the deep structural parameters of the underlying structural model had stayed constant throughout the sample period and there is significant changes to the volatility of the structural shocks counterfactual experiments based on the model with the best empirical fit indicate that the change in the policy rule as well as changes to the volatility of the structural shocks over the sample period are crucial features in explaining uk s macroeconomic performance

social learning and monetary policy rules we analyse the effects of social learning in a monetary policy context social learning might be viewed as more descriptive of actual learning behaviour in complex market economies in our model taylor principle governs uniqueness and expectational stability of rational expectations equilibrium ree under homogeneous recursive algorithms we find that the taylor principle is not necessary for convergence to ree minimum state variable msv equilibrium under social learning sunspot equilibria exist in the indeterminate region our agents cannot co ordinate on a sunspot equilibrium in general form specification however they can co ordinate on common factor specification we contribute to the use of genetic algorithm learning in stochastic environments

classifying monetary economics fields and methods from past to future we propose a simple yet sufficiently encompassing classification scheme of monetary economics it comprises three fundamental fields and six recent areas that expand within and across these fields the elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature neither is this an attempt to produce a relatively complete systematization our intention in taking stock is not finality or exhaustiveness we rather suggest a viewpoint and a possible ordering of the accumulating knowledge our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large

harvesting the commons we study a socio ecological model in which a continuum of consumers harvest a common property renewable natural resource markov perfect nash equilibria of the corresponding non cooperative game are derived and are compared with collectively optimal harvesting policies the underlying mechanisms that drive open access commons in our model are shaped by population size harvesting costs and the ecosystem s productivity if other things equal population is small relative to harvesting costs unmanaged commons do not face destruction more strikingly they are harvested at the collectively optimal rate property rights do not matter in that parametric regime because the resource has no social scarcity value however if other things equal population is large relative to harvesting costs open access renewable natural resources suffer from the tragedy of the commons property rights matter there because the resource has a social scarcity price the population size relative to harvesting costs at which the socio ecological system bifurcates is an increasing function of the ecosystem s productivity a sudden crash in productivity population overshoot or decline in harvesting costs can tip an unmanaged common into ruin the model provides a way to interpret historical and archaeological findings on the collapse of those societies that have been studied by scholars

are non fundamental equilibria learnable in models of monetary policy abstract recent models of monetary policy can have indeterminacy of equilibria which is often viewed as a difficulty of these models we consider the significance of indeterminacy using the learning approach to expectations formation we employ expectational stability as a selection criterion for different equilibria and derive the expectational stability and instability conditions for forward looking multivariate models both without and with lags the results are applied to several monetary policies

learnability of an equilibrium with private information abstract this paper investigates the learnability of an equilibrium with private information agents of each type have their own private information about an exogenous variable and conduct adaptive learning with a heterogeneously misspecified perceived laws of motion plm that includes only this variable the paper shows that the existence of private information has a nonnegative impact on the learnability of the equilibrium that is the condition for learnability is unaffected or relaxed by heterogeneity and or misspecification in plms caused by private information in a new keynesian model with private information about fundamental shocks the learnability of the equilibrium is ensured by the taylor principle of monetary policy the paper also confirms that these results hold true not only in the presence of private information but also in a variety of informational structures

who delivers partisan clients in the argentine electoral market why do some parties fail to benefit from patronage in pork ridden political systems this article analyzes the interaction between patronage and partisanship to explain why some incumbents are more likely to benefit from pork politics than others we explain such differences by focusing on political parties access to resources supply side and voters dependence on fiscal largesse demand side we show how these differences affect the patron s choice of public sector wages and employment we use subnational level data to show different electoral returns from patronage for the two major political coalitions in argentina peronism and the ucr alianza and their effect on preferences over public sector wages and employment w hy do some political parties fail to benefit from patronage in pork ridden political systems this article analyzes the interaction between patronage and partisanship to explain why some incumbents are more likely to benefit from pork politics than others we explain returns to patronage by highlighting differences in the political parties access to resources supply side and the voter s dependence on public sector jobs demand side we propose that just as political parties cater their policies to particular groups of voters they pursue different strategies when allocating pork in exchange for support on the supply side we highlight the importance of partisan biases in the fiscal and electoral institutions that regulate the access and distribution of public resources on the demand side we show that patronage is a distributive mechanism that provides different returns to voters with different skills and labor market expectations

monetary policy expectations and commitment commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies a number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy we assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents a reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts

optimized taylor rules for disinflation when agents are learning abstract when private agents learn a new policy rule an optimal simple taylor rule for disinflation differs substantially from that under full information the central bank can reduce target inflation without much difficulty but adjusting reaction coefficients on lagged inflation and output is more costly temporarily explosive dynamics emerge when there is substantial disagreement between perceived and actual feedback parameters making the transition highly volatile the bank copes by choosing reaction coefficients close to the private sector s prior mode thereby sacrificing long term performance in exchange for achieving lower transitional volatility

remittances and social spending remittances are a significant source of foreign exchange for developing economies i argue that remittances due to their compensation and insurance functions will increase the general income level and economic security of recipients thereby reducing their perceived income risk over time this will dampen demand from recipients for government taxation and social insurance therefore i expect increases in income remitted to an economy to result in reduced levels of social welfare transfers at the macro level this dynamic can help us to understand spending patterns in developing democracies and the absence of demand for social security transfers in countries with high levels of inequality and economic insecurity i test this argument with a sample of 18 latin american states over the period 1990 to 2009 and subject the central causal mechanism to a battery of statistical tests the results of these tests provide strong support for this argument