optimal monetary policy in an economy with inflation persistence abstract this paper studies optimal monetary policy in a model where inflation is persistent two types of price setters are assumed to exist one acts rationally given calvo type constraints on price setting the other type sets prices according to a rule of thumb this results in a phillips curve with both a forward looking term and a backward looking term the phillips curve nests a standard purely forward looking phillips curve as well as a standard purely backward looking phillips curve as special cases a cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic a central bank loss function for this model is derived from a second order taylor approximation of the household s welfare function optimal monetary policy for different relative values of the forward and backward looking terms is then analyzed for both the commitment case and the case of discretion

a method for solving general equilibrium models with incomplete markets and many financial assets abstract this paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice the method can be applied to models with heterogeneous agents time varying investment opportunity sets and incomplete asset markets we illustrate the method using a two country model with production we check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties we then apply the method to an incomplete markets version where no analytic solution is available in all versions the standard accuracy tests confirm the effectiveness of our method

optimal price level drift under commitment in the canonical new keynesian model in both the canonical and many extended versions of the new keynesian model optimal monetary policy under commitment implies price level stationarity as long as expectations are rational we show that this is no longer the case if the central bank and private agents make decisions before observing current shocks the optimal amount of price level drift in response to unexpected innovations to inflation is quantitatively important this result has important implications for monetary policy including the design of the optimal loss function for the central bank if it cannot commit to its future policies a la fois dans la version canonique du nouveau modele keynesien et de ses versions etendues la politique monetaire optimale quand il y a engagement implique qu il y aura stationnarite du niveau des prix aussi longtemps que les anticipations sont rationnelles on montre que ce n est plus le cas si la banque centrale et les agents prives prennent des decisions avant d observer les chocs courants le montant optimal de la derive du niveau des prix en reponse aux innovations non anticipees dans l inflation est quantitativement important ce resultat a des implications importantes pour la politique monetaire y compris le design d une fonction de perte optimale pour la banque centrale si elle ne peut pas s engager a poursuivre ses politiques dans l avenir

solving exchange rate puzzles with neither sticky prices nor trade costs we present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved the flexible price two country monetary model is extended to include a consumption externality with habit persistence habit persistence is modeled using campbell cochrane preferences with deep habits along the lines of the work of ravn schmitt grohe and uribe by deep habits we mean habits defined over goods rather than countries the model is simulated using the artificial economy methodology it offers a neo classical explanation of the meese rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting finally the model naturally generates the negative slope in the standard forward market regression

public debt discretionary policy and inflation persistence we describe a simple mechanism that generates inflation persistence in a standard sticky price model of optimal fiscal and monetary policy key to this mechanism is that policies are implemented under discretion the government s discretionary incentive to erode the real value of nominal public debt by means of surprise inflation renders inflation expectations and in further consequence equilibrium inflation rates highly correlated with the stock of public debt debt in turn is highly persistent allowing for tax smoothing in the face of disturbances due to the aforementioned correlation the persistence in debt carries over to inflation our analysis uncovers a non monotonic effect of nominal rigidities on inflation persistence and shows that government debt under discretion does not display the near random walk property familiar from the ramsey literature a calibrated version of the model that incorporates a moderate degree of monopolistic competition and price stickiness is quantitatively consistent with the inflation dynamics experienced in the usa since the volcker disinflation of the early 1980s

external balances trade and financial conditions abstract i present a new model for the u s external position that accounts for the accumulation of international debt over the past 60 years the model is based on the present value restriction that links a country s external position to future trade flows and financial conditions in the absence of arbitrage opportunities and ponzi schemes it features the role played by the stochastic discount factor the trade and valuation adjustment channels and provides a decomposition of the u s external position into secular and cyclical components the model shows that shocks operating via the valuation channel are the dominant drivers of cyclical dynamics accounting for approximately 80 of the variance over the 60 year sample this channel works primarily via capital gains and losses on u s foreign assets and is closely tied to the international value of the u s dollar in contrast there is no evidence that valuation channel adjustments contribute to the secular dynamics but differences between the average returns on foreign assets and liabilities raise the steady state debt to gdp ratio from approximately 12 to 15 the long term deterioration in the u s position represents a move towards the steady state before the early 1990s and a move away from the steady state thereafter i quantify the expected improvement in future u s trade balances needed to justify this as a sustainable path and show that they are very different from its actual behavior during the last 60 years i also study the behavior of the u s position during the 2007 2008 financial crisis

renewable energy as a luxury a qualitative comparative analysis of the role of the economy in the eu s renewable energy transitions during the double crisis the european union eu faces a double crisis both economic and environmental which has brought into stark relief the question of whether climate change mitigation and economic growth are mutually exclusive is saving the environment a luxury reserved for wealthy countries with less affluent countries being too poor to be green we seek to address this important and timely question using fuzzy set qualitative comparative analysis fsqca to analyse the causal relationship between economic growth and stability and the expansion of renewable electricity shares among the european union s eu 28 member states during the recent economic recession 2008 2013 our paper analyses the recent economic and financial crisis and its effects on sustainability transitions and establishes a new indicator for progress in renewable electricity transitions in the context of europe s 2020 targets it therefore extends the sustainability as a luxury debate to include renewable energy the analysis reveals an ambivalent picture of the role of wealth in renewable energy transitions ret in europe indeed driven by the eu s common renewable energy targets the findings suggest that rets are promoted both because and in spite of the means

targeted transfers and the fiscal response to the great recession abstract between 2007 and 2009 government expenditures increased rapidly across the oecd countries while economic research on the impact of government purchases has flourished in the data most of the increase in expenditures was in government transfers after documenting this fact we argue that future research should focus on the positive impact of transfers towards this we present a model in which there is no representative agent and ricardian equivalence does not hold because of uncertainty imperfect credit markets and nominal rigidities targeted lump sum transfers are expansionary both because of a neoclassical wealth effect and because of a keynesian aggregate demand effect

how forward looking is optimal monetary policy we calculate optimal monetary policy rules for several variants of a simple optimizing model of the monetary transmission mechanism with sticky prices and or wages we show that robustly optimal rules can be represented by interest rate feedback rules that generalize the celebrated proposal of taylor 1993 optimal rules however require that the current interest rate operating target depend positively on the recent past level of the operating target and its recent rate of increase in a way that is characteristic of estimated central bank reaction functions but not of taylor s proposal we furthermore find that a robustly optimal policy rule is almost inevitably an implicit rule that requires the central bank to use a structural model to project the economy s evolution under the contemplated policy action however calibrated examples suggest that optimal rules place less weight on projections of inflation or output many quarters in the future than do rules often discussed in the literature on inflation targeting or in the current practice of inflation forecast targeting central banks

determinacy and identification with taylor rules the new keynesian taylor rule theory of inflation determination relies on explosive dynamics by raising interest rates in response to inflation the fed induces ever larger inflation unless inflation jumps to one particular value on each date however economics does not rule out explosive inflation so inflation remains indeterminate attempts to fix this problem assume that the government will choose to blow up the economy if alternative equilibria emerge by following policies we usually consider impossible the taylor rule is not identified without unrealistic assumptions thus taylor rule regressions do not show that the fed moved from passive to active policy in 1980

the risky steady state we propose a simple quantitative method to linearize around the risky steady state of a small open economy unlike when the deterministic steady state is used the net foreign asset position is well defined we allow for stochastic income and stochastic interest rate

the non optimality of proposed monetary policy rules under timeless perspective commitment abstract in a near canonical forward looking model the timeless perspective form of commitment typically provides outcomes that are on average superior to those resulting from discretion the specific condition that appears in the literature is however not optimal from the relevant perspective

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

an investigation of the gains from commitment in monetary policy this paper proposes a simple framework for analyzing a continuum of monetary policy rules characterized by differing degrees of credibility in which commitment and discretion become special cases of what we call quasi commitment the monetary policy authority is assumed to formulate optimal commitment plans to be tempted to renege on them and to succumb to this temptation with a constant exogenous probability known to the private sector by interpreting this probability as a continuous measure of the lack of credibility of the monetary policy authority we investigate the welfare effect of a marginal increase in credibility our main finding is that in a simple model of the monetary transmission mechanism most of the gains from commitment accrue at relatively low levels of credibility in our benchmark calibration a commitment expected to last for only 6 quarters is enough to bridge 75 of the welfare gap between discretion and commitment this seems to justify the well known concern of monetary policy makers about their credibility even in a world with limited access to commitment technologies

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

discretionary monetary policy and the zero lower bound on nominal interest rates abstract ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in new keynesian models a stochastic forward looking model with an occasionally binding lower bound calibrated to the u s economy suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy the fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound the welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the phillips curve these results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment

openness imperfect exchange rate pass through and monetary policy abstract this paper analyses the implications of imperfect exchange rate pass through for optimal monetary policy in a linearised open economy dynamic general equilibrium model calibrated to euro area data imperfect exchange rate pass through is modelled by assuming sticky import price behaviour the degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output net trade and the exchange rate it is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

equilibrium unemployment job flows and inflation dynamics this paper develops a general equilibrium model to explain a set of facts regarding job flows unemployment and inflation dynamics it integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities the labor market displays matching frictions and endogenous job destruction the model can explain the cyclical behavior of unemployment job creation job destruction and the joint fluctuations of the labor input along both the extensive and the intensive margin conditional on a shock to monetary policy allowing for variation of the labor input at the extensive margin leads to a significantly lower elasticity of marginal costs with respect to output this helps to explain the sluggishness of inflation and the persistence of output after a monetary policy shock

revealed preference and household production abstract the paper deals with the possibilities of recovering the underlying preference ordering from observed behavior when nonmarket goods are employed in household production the problem is relevant for the evaluation of environmental goods and for the measurement of welfare in environmental policy it is shown that preferences can be recovered if and only if a corresponding mixed demand system can be integrated this system can be derived from observable behavior and the household production functions imposed the conditions for its integrability are presented and can be checked therefore the approach suggested is operational and allows to decide whether the behavior observed and the household production functions chosen as maintained hypothesis are consistent this result is important since the evaluation of nonmarket goods in this framework crucially depends on the choice of the household production functions

home bias and high turnover dynamic portfolio choice with incomplete markets why do investors trade a lot in foreign assets and hold so little of them in their portfolios this paper shows that both observations can arise naturally in the presence of nondiversifiable nontraded consumption risk when each country specializes in production preferences exhibit consumption home bias and asset markets are incomplete using a general equilibrium two country two sector tradable and nontradable model of the world economy with production i show that low diversification occurs because variations in relative prices i increase the riskiness of foreign assets and ii facilitate risk sharing across countries large and volatile capital flows are necessary to take advantage of international risk premia differentials that occur in response to productivity changes in the nontradable sector i characterize the optimal portfolio holdings the evolution of the investment opportunity set the risk premium and the dynamics of capital flows using a new methodology for solving dynamic general equilibrium models with incomplete markets and portfolio choice

can proximity to urban green spaces be considered a luxury classifying a non tradable good with the use of hedonic pricing method abstract environmental goods are sometimes considered a luxury that only the rich can afford this is no less true in the case of green spaces however a typical microeconomic lens is not relevant to study the potential luxury of non tradable goods typically the distributional interpretation of the income elasticity of the willingness to pay wtp for such goods would involve stated preferences valuation methods the possibility to describe the luxury of green space proximity based on revealed preferences methods has not been evaluated yet through this study we would like to fill this gap we proposed a three step analysis of the apartment market in lodz poland based on the hedonic pricing method to check how the marginal wtp mwtp for proximity to parks forests differs among apartment price sub segments we discuss whether and to what extent the variability of the mwtp could be linked with the presumed luxury of green space proximity we found that proximity does not result in increased apartment prices for all parks and forests the estimated mwtp for the proximity to selected parks rises in consecutive apartment price sub segments this could be interpreted as a sign of the luxury of living close to these parks by apartment buyers

incomplete credit markets and monetary policy abstract we study monetary policy when private credit markets are incomplete the macroeconomy we study has a large private credit market in which participant households use non state contingent nominal contracts nscnc a second small group of households only uses cash supplied by the monetary authority and cannot participate in the credit market there is an aggregate shock we find that despite the substantial heterogeneity the monetary authority can provide for optimal risk sharing in the private credit market and thus overcome the nscnc friction via a counter cyclical price level rule the counter cyclical price level rule is not unique to pin down a unique monetary policy rule we consider two secondary goals for the monetary authority i expected inflation targeting and ii nominal gdp targeting we examine the impact of each of these approaches on the price level rule and other nominal variables in the economy

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

risk external adjustment and capital flows abstract this paper studies the process of external adjustment i develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates interest rates and consumption in the u s and europe the model includes cross border holdings of bonds and equity and financial frictions that impede international risk sharing i find that external adjustment following endowment shocks predominantly takes place via trade flows consistent with the intertemporal approach to the current account in contrast preference shocks that change investors risk aversion induce adjustment via the trade and valuation channels where the latter includes the effects of unexpected capital gains and loss on existing cross border holdings and changes in the expected future return differentials between foreign assets and liabilities the model estimates imply that the valuation channel of external adjustment is more important for the u s than the trade channel consistent with this implication i show that forecasts of future return differentials contributed most to the volatility of the u s net foreign asset position in the post bretton woods era

is inflation sticky abstract new keynesian sticky price models predict that monetary policy can affect real variables however they also predict that inflation can be reduced without depressing output or employment in fact bringing down inflation is costly presenting a challenge to the new keynesian model two departures from the new keynesian model predict costly disinflation one assumes sticky inflation rather than sticky prices while the other assumes less than perfectly rational expectations taking into account information from surveys of inflation expectations i find the evidence suggests that inflation is not sticky and that inflation expectations are less than perfectly rational

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

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

price level versus inflation targeting abstract this paper shows that price level targeting outperforms inflation targeting in the standard new keynesian model under the assumption that the central bank is forced to operate in an environment characterized by discretion in the benchmark case with no persistence in the shocks the commitment solution can be fully replicated intuitively price level targeting introduces history dependence and a stationary level of prices both of which are prominent features of the commitment solution

integrating non monetary and monetary valuation methods softgis and hedonic pricing abstract in order to address the increasing need for improved linkages between different value perspectives we examine the possibility of integrating two valuation methods the non monetary softgis and monetary hedonic pricing we find them compatible and their output more comprehensive compared to traditional valuation based on one value perspective the public participatory softgis survey delivers information on the perception of urban green spaces which we use as a criterion for dividing green space categories in a hedonic pricing model we find that the perception expressed in the survey is generally consistent with the impact on property prices in the case of formal green spaces however it is inconsistent when it comes to informal ones places identified as lacking well maintained greenery exert a positive influence on property prices while positively evaluated informal green spaces had no impact at all we identify the latter as a typical trade off between different value perspectives informal green spaces are perceived differently following a monetary and a non monetary approach

time varying rational expectations models abstract this paper develops a comprehensive theory for rational expectations models with time varying random coefficients based on the multiplicative ergodic theorem it develops a linear algebra in terms of lyapunov exponents defined as the asymptotic growth rates of trajectories together with their associated lyapunov spaces they provide a perfect substitute for the eigenvalue eigenspace analysis used in constant coefficient models in particular they allow the construction of explicit solution formulas similar to the standard case these methods and their numerical implementation is illustrated using a canonical new keynesian model with a time varying policy rule and lagged endogenous variables

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

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

is the income elasticity of environmental improvements less than one we estimated the income elasticity of environmental improvements for a number of european data sets the value of this parameter is consistently found to be less than one with few exceptions our findings are compared with state of the art contingent valuation studies from other countries we also compared our findings with those reported in the literature on charitable donations and corporate donations these studies show a similar pattern donations decrease as a percentage of income as income increases

what drives us foreign borrowing evidence on external adjustment to transitory and permanent shocks the joint dynamics of us net output consumption and valuation adjusted foreign assets and liabilities characterized empirically following lettau and ludvigson 2004 is shown to be strikingly consistent with current account theory while us consumption is virtually insulated from transitory shocks these contribute considerably to the variation in net output and even more so in gross foreign positions arguably smoothing temporary variations in returns a single permanent shock naturally interpreted as a productivity shock raises consumption swiftly while causing net output to adjust only gradually this leads to persistent procyclical external deficits but interestingly moves gross assets and liabilities in the same direction

monetary and fiscal policy in a liquidity trap with inflation persistence abstract this paper relies on the new keynesian model with structural inflation persistence to characterize the optimal monetary and fiscal policy in a liquidity trap it shows that with a phillips curve that is both forward and backward looking the monetary policy that is implemented during a liquidity trap episode can be sufficient to avoid a depression the central bank does not need to commit beyond the end of the crisis to get some traction on economic activity regarding fiscal policy inflation persistence justifies some front loading of government expenditures to get inflation started such as to reduce the real interest rate the magnitude of the optimal fiscal stimulus is decreasing in the degree of inflation persistence finally if inflation persistence is due to adaptive expectations rather than to price indexation then monetary policy is ineffective while the optimal fiscal stimulus is large and heavily front loaded

nontraded goods nontraded factors and international non diversification abstract can the presence of nontraded consumption goods or nontraded factors of production explain the high degree of home bias displayed by investor portfolios we find that the answer is no so long as individuals have access to free international trade in financial assets in particular it is never optimal to exhibit home bias with respect to domestic traded good equities by contrast holdings of nontraded good equities in an optimal portfolio will depend sensitively on the elasticity of substitution between traded and nontraded goods

optimal monetary policy under commitment with a zero bound on nominal interest rates we determine optimal monetary policy under commitment in a forwardlooking new keynesian model when nominal interest rates are bounded below by zero the lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear a calibration to the u s economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached while the empirical magnitude of u s mark up shocks seems too small to entail zero nominal interest rates shocks affecting the natural real interest rate plausibly lead to a binding lower bound under optimal policy however this occurs quite infrequently and does not imply positive average inflation rates in equilibrium interestingly the presence of binding real rate shocks alters the policy response to non binding markup shocks

home bias in open economy financial macroeconomics standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of financial globalization investors still hold a disproportionate share of local equities in their portfolio the equity home bias french and poterba 1991 we review the various explanations of this puzzling phenomenon in the context of recent developments in macroeconomic modelling that have allowed to incorporate sophisticated international portfolio choices in standard two country general equilibrium models we refer to this literature as open economy financial macroeconomics we focus on three broad classes of explanations i hedging motives in frictionless financial markets real exchange rate and non tradable income risk ii asset trade costs in international financial markets such as transaction costs differences in tax treatments between national and foreign assets iii informational frictions and behavioural biases these recent developments raise the need for new portfolio facts beyond the equity home bias and we will present some new evidence on cross border asset holdings across different types of assets equities bonds and bank lending we also present some new micro data on institutional holdings of equity at the fund level these data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

credit crises precautionary savings and the liquidity trap we use a model a la bewly huggett ayagari to explore the eects of a credit crunch on consumer spending households borrow and lend to smooth idiosyncratic income shocks facing an exogenous borrowing constraint we look at the economy response after an unexpected permananent tightening of this constraint the interest rate drops sharply in the short run and then adjusts to a lower steady state level this is due to the fact that after the shock a large fraction of agents is far below their target holdings of precautionary savings and this generates a large temporary positive shock to net lending we then look at the eects on output here two opposing forces are present as households can deleverage in two ways by consuming less and by working more we show that under a reasonable parametrization the eect on consumer spending dominates and precautionary behavior generates a recession if we add nominal rigidities two things happen i supply side responses are muted and ii there is a lower bound on the interest rate adjustment these two elements tend to amplify the recession caused by the credit tightening

can portfolio rebalancing explain the dynamics of equity returns equity flows and exchange rates we explore whether the pattern of international equity returns equity portfolio flows and exchange rate returns are consistent with the hypothesis that unhedged global investors rebalance their portfolio in order to limit their exchange rate exposure when there are 1 relative equity return and 2 exchange rate shocks we also explore whether 3 equity flow shocks influence the exchange rates and relative equity prices in the estimation of the var system we do not impose any causal ordering upon the primitive shocks but instead identify the system based on theoretical priors about the contemporaneous conditional correlations between the three variables international data for the five largest equity markets are consistent with a theory in which equity returns and portfolio rebalancing are an important source of exchange rate dynamics

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

optimal monetary policy with countercyclical credit spreads we study optimal monetary policy in a new keynesian dynamic stochastic general equilibrium dsge model with a credit channel and relationship lending in banking we show that borrowers bank specific deep habits give rise to countercyclical credit spreads which in turn make optimal monetary policy depart substantially from price stability under both discretion and commitment our analysis shows that the welfare costs of setting monetary policy under discretion with respect to the optimal ramsey plan and of using simpler suboptimal policy rules are strictly increasing in the magnitude of deep habits in credit markets and market power in banking

environmental goods and the distribution of income the paper presents a theoretical investigation of the distributional impacts of environmental commodities it introduces an appropriate framework defines concepts for measuring benefits and examines the determinants of benefit incidence within this setup its emphasis is on methodology and on recognizing the relevant economic variables and information it turns out that in an equal preference model the magnitude of the income elasticity of marginal willingness to pay for an environmental good is the crucial variable determining progressivity it is related to a number of other elasticities which are more easily accessible to an empirical estimation

international capital flows abstract the surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice we develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two country dynamic stochastic general equilibrium dsge model we focus on the time variation in portfolio allocation following shocks and resulting capital flows endogenous time variation in expected returns and risk which are the key determinants of portfolio choice affect capital flows in often subtle ways the model is consistent with a broad range of empirical evidence an additional contribution of the paper is to overcome the technical difficulty of solving dsge models with portfolio choice by developing a broadly applicable solution method

monetary politics and unemployment persistence abstract this paper develops a positive model of monetary policy that allows for persistent unemployment and electoral uncertainty the common credibility problem associated with low inflation monetary policy results in both a more severe inflation bias and a stabilization bias however a simple state contingent performance contract eliminates both biases monetary policy is also subject to two different strategic political considerations it is used to influence future policy decisions as well as to increase the incumbent party s probability of re election this results in a political business cycle which however is fundamentally different for left wing and right wing governments

elasticities of demand and willingness to pay for environmental services in sweden are environmental services luxuriesor necessities are low income groupsrelatively more willing to pay forenvironmental improvements than high incomegroups the discussion on the shape of theenvironmental kuznets curve and environmentaljustice call for analyses that approach thesequestions following a survey based approachfor modelling the demand for public goods thispaper provides estimates of income and priceelasticities of demand for reduced marineeutrophication effects in the case of thebaltic sea using data from five swedishcontingent valuation studies point estimatesindicate that reduced marine eutrophicationeffects can be classified as a necessity and anordinary and price elastic service confidenceintervals show however that the classificationas a necessity is not statisticallysignificant income elasticities of willingnessto pay not to be confused with incomeelasticities of demand are estimated for abroad range of environmental services insweden a basic finding is that income tends toinfluence willingness to pay positively andsignificantly the elasticity estimates are inmost cases greater than zero but less thanunity indicating that the benefits ofenvironmental improvements tend to beregressively distributed in a cost benefitanalysis of a project suggesting environmentalimprovements distributional concerns thereforecall for an introduction of weights or at leasta sensitivity analysis of how weighting wouldchange decisions about the project s socialprofitability

optimal monetary policy at the zero interest rate bound what should a central bank do when faced with a weak aggregate demand even after reducing the short term nominal interest rate to zero to address this question we solve a central bank s intertemporal loss minimization problem in which the non negativity constraint on nominal interest rates is explicitly considered we find that the optimal path is characterized by policy inertia in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level by making such a commitment the central bank is able to achieve higher expected inflation lower long term nominal interest rates and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady state level

contingent valuation and social choice the contingent valuation method for estimating the existence value of natural resources is examined for psychophysical robustness statistical reliability and economic sensibility extensions of standard models for willingness to pay and suitable econometric techniques for analyzing these models are developed the analysis is applied to a series of experiments on the value of preserving wilderness areas in the western united states the results call into question the reliability of the cv method for estimating existence values

asset prices and real exchange rates with deep habits i introduce an external habit for each consumption good known as deep habits into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries i show that deep habits coupled with consumption home bias account for a wide range of asset pricing and exchange rate moments calibrated to a set of ten countries the model reproduces the cross sectional evidence on currency risk premiums when sorting on interest rates interest rate volatility innovations to global exchange rate volatility and value hence the model provides an equilibrium interpretation of these empirical regularities

asset pricing implications of a new keynesian model to match the stylised facts of goods and labour markets the canonical new keynesian model augments the optimising neoclassical growth model with nominal and real rigidities we ask what the implications of this type of model are for asset prices using a second order numerical solution to the model we examine bond and equity returns the equity risk premium and the behaviour of the real and nominal term structure we catalogue the factors that are most important for determining the size of risk premia and the slope and level of the yield curve in a world of technology shocks only increasing the degree of real rigidities raises risk premia and increasing nominal rigidities reduces risk premia in a world of monetary policy shocks only both real and nominal rigidities raise risk premia the results indicate that the implications of the new keynesian model for average asset returns depend critically on the

smoothed interest rate setting by central banks and staggered loan contracts i investigate a new source of economic stickiness namely staggered loan interest rate contracts under monopolistic competition this study introduces this mechanism into a standard new keynesian model simulations show that a response to a financial shock is greatly amplified by the staggered loan contracts although a response to a productivity cost push or monetary policy shock is not much affected i derive an approximated loss function and analyse optimal monetary policy unlike other models the function includes a quadratic loss of the first order difference in loan rates thus central banks have an incentive to smooth the policy rate

the perils of nominal targets a monetary authority can be committed to pursuing an inflation price level or nominal gdp target yet systematically fail to achieve the prescribed goal constrained by the zero lower bound on the policy rate the monetary authority is unable to implement its objectives when private sector expectations stray far enough from the target low inflation expectations become self fulfilling resulting in an additional markov equilibrium in which the monetary authority falls short of the nominal target average output is below its efficient level and the policy rate is typically low introducing a stabilization goal for long term nominal rates can implement a unique markov equilibrium without fully compromising stabilization policy

country portfolios in open economy macro models this paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models the method is widely applicable simple to implement and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset it can be used in models with any number of assets whether markets are complete or incomplete and can be applied to stochastic dynamic general equilibrium models of any dimension so long as the model is amenable to a solution using standard approximation methods we first illustrate the approach using a simple two asset endowment economy model and then show how the results extend to the case of any number of assets and general economic structure

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

demand for environmental quality an empirical analysis of consumer behavior in sweden in this paper we estimate the income elasticity of demand for recreational services and other traditional groups of goods in sweden and test for potential changes in such estimates over the twentieth century due to the difficulty of directly observing the demand for recreational services we employ an indirect methodology by using the demand for some outdoor goods as a proxy for the demand for recreational services in line with most prior research our results confirm the expectation that recreational services as a public good is a luxury good in sweden our results also show that the income elasticities for traditional goods are stable over time indicating that consumer preferences for expenditure on these specific commodities do not change over time

the relationship between the income elasticities of demand and willingness to pay abstract the relationship between income and willingness to pay for collectively provided public environmental goods is investigated we show that while the income elasticity of willingness to pay and the ordinary income elasticity of demand are related knowledge of one is insufficient to determine the magnitude or even the sign of the other the income elasticity of willingness to pay is influenced by additional factors which are generally unobservable examples are provided to illustrate the degree to which the two income elasticities may diverge our results indicate that even when goods are demand luxuries they may or may not have income elasticities of willingness to pay which are greater than one

the state of new keynesian economics a partial assessment i have benefited from the financial support of the generalitat de catalunya agaur grant 2017sgr1393 and the ministerio de economia industria y competitividad grant eco2017 87827

planning for green infrastructure the spatial effects of parks forests and fields on helsinki s apartment prices abstract as the importance of urban green spaces is increasingly recognised so does the need for their systematic placement in a broader array of socioeconomic objectives from an urban planning and economics perspective this represents a spatial task if more land is allocated to various types of green how do the economic effects propagate throughout urban space this paper focuses on the spatial marginal effects of forests parks and fields and estimates spatial hedonic models on a sample of apartment transactions in helsinki finland the results indicate that the capitalization of urban green in apartment prices depends on the type of green but also interacts with distance to the city centre additionally the effects contain variable pure and spatial spillover impacts also conditional on type and location the separation of which highlights aspects not commonly accounted for the planning of green infrastructure will therefore benefit from parameterizing interventions according to location green type and character of spatial impacts