the inflation output variability tradeoff and monetary policy evidence from a garch model this paper empirically investigates the taylor curve volatility tradeoff in light of the stochastic behavior of the conditional variances of output and inflation stressing structural instability between periods before and after the 1979 1982 monetary policy regime change i implement a bivariate generalized autoregressive conditional heteroskedasticity model to capture the output inflation variability tradeoff and to explore the plausible impact of a change in the federal funds rate on the two conditional volatilities i further evaluate the impacts of anticipated and unanticipated policy actions measured by two alternative policy reaction functions one from a vector autoregression based reduced form equation and another based on the taylor rule in addition to showing a volatility tradeoff relationship the empirical model reveals different magnitudes of policy effects on output and inflation volatility across the two sample periods

solution of macromodels with hansen sargent robust policies some extensions abstract we summarize some methods useful in formulating and solving hansen sargent robust control problems and suggest extensions to discretion and simple rules matlab octave and gauss software is provided we illustrate these extensions with applications to the term structure of interest rates the time inconsistency of optimal monetary policy the effects of expectations on the variances of inflation and output and on whether central banks should make their forecasts public

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

the inflation and output variability tradeoff evidence from a garch model abstract this paper empirically investigates the possibility of a tradeoff between the variability of inflation and output gap over the period 1960 1997 in light of a bivariate garch model there is strong evidence of temporal instability in the garch process and the variability tradeoff is more apparent for the post october 1979 subperiod the slope of the tradeoff nevertheless appears to be considerably flat

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

time inconsistency and the exchange rate channel of monetary policy this paper analyses time inconsistency problems related to the exchange rate channel of monetary policy within a simple open economy macroeconomic model where the exchange rate is the only forward looking variable we show that a difference emerges between optimal policy under discretion and under commitment moreover the nature of the time inconsistency problem resembles that resulting from standard new keynesian models when cost push shocks occur the exchange rate channel gives rise to excessive output stabilisation and insufficient inertia in monetary policy under a discretionary policy

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

inflation output variance trade offs and optimal monetary policy the author estimates the inflation output gap variance trade off faced by monetary policymakers in the united states for policymakers who care about deviations of inflation around target and output around potential the estimated trade off represents the optimal policy frontier given the structure of the economy policymakers can do no better than to attain weighted variances of inflation and output that lie on the frontier the author finds that the variance trade off becomes quite severe when the standard deviation of inflation or output drops much below 2 percent this suggests that approximately balanced responses to policy goals are consistent with reasonable preferences over inflation and output variability copyright 1997 by ohio state university press

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

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

a small estimated euro area model with rational expectations and nominal rigidities abstract we estimate a small model of the euro area to be used for evaluating alternative monetary policy strategies starting with the relationship between output and inflation we compare the fit of the nominal wage contracting model due to taylor j political econom 88 1980 1 and the relative real wage contracting model proposed by buiter and jewitt the manchester school 49 1981 211 reprinted in buiter ed macroeconomic theory and stabilization policy manchester university press manchester 1989 and estimated with u s data by fuhrer and moore quart j econom 110 1995 127 while fuhrer and moore reject nominal contracts in favor of relative contracts which induce more inflation persistence we find that both specifications fit euro area data reasonably well when considering france germany and italy separately however we find that nominal contracts fit german data better while the relative contracting model does well with respect to formerly high inflation countries such as france and italy we close the model by estimating an aggregate demand relationship and investigate the implications of nominal versus relative contracts for the inflation output variability tradeoff when monetary policy follows taylor s rule

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

evaluating point and density forecasts of dsge models this paper investigates the accuracy of point and density forecasts of four dsge models for inflation output growth and the federal funds rate model parameters are estimated and forecasts are derived successively from historical u s data vintages synchronized with the fed s greenbook projections point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods despite their common underlying new keynesian modeling philosophy forecasts of different dsge models turn out to be quite distinct weighted forecasts are more precise than forecasts from individual models the accuracy of a simple average of dsge model forecasts is comparable to greenbook projections for medium term horizons comparing density forecasts of dsge models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts

output volatility in australia a number of papers have documented a significant decline in real gdp volatility in several major oecd economies some authors have presented evidence to suggest that this is the outcome of a one off structural break from a high to low volatility state whilst others have estimated regime switching models that indicate low volatility regime states have dominated in recent years this article provides further evidence on the general properties of output volatility for australia including evidence of a significant moderation in output volatility for the country that occurred in the early 1980s estimates of various garch models of real gdp growth are also provided to further examine shorter term volatility features of the australian economy that are associated with its business cycle a regime shift dummy is maintained in all models of the conditional variance in order to account for the regime shift in volatility and evidence is found of significant business cycle effects including leverage effects and asy

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

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

hedging strategies in energy markets the case of electricity retailers as market intermediaries electricity retailers buy electricity from the wholesale market or self generate for re sale on the retail market electricity retailers are uncertain about how much electricity their residential customers will use at any time of the day until they actually turn switches on while demand uncertainty is a common feature of all commodity markets retailers generally rely on storage to manage demand uncertainty on electricity markets retailers are exposed to joint quantity and price risk on an hourly basis given the physical singularity of electricity as a commodity in the literature on electricity markets few articles deal on intra day hedging portfolios to manage joint price and quantity risk whereas electricity markets are hourly markets the contributions of the article are twofold first we define through a var and cvar model optimal portfolios for specific hours 3 am 6 am 12 pm based on electricity market data from 2001 to 2011 for the french market we prove that the optimal hedging strategy differs depending on the cluster hour secondly we demonstrate the significantly superior efficiency of intra day hedging portfolios over daily therefore weekly and yearly portfolios over a decade 2001 2011 our results clearly show that the losses of an optimal daily portfolio are at least nine times higher than the losses of optimal intra day portfolios

carbon abatement potential of solar home systems in india and their cost reduction due to carbon finance about 78 million rural households in india reportedly lack access to grid electricity about 67 million of them use kerosene for lighting government of india is promoting the use of solar home systems shs as one of the options for meeting lighting requirements in households in remote and less inhabited villages about 363 399 shs were reportedly disseminated across the country by december 2007 apart from meeting the basic lighting need of the households shs also help in abating the emissions of green house gases ghgs by directly displacing the use of kerosene in households that currently use it for lighting this study has attempted at estimating the co2 mitigation potential of shs in india by studying the potential for their diffusion and the appropriate baseline subsequently the scope for cost reduction to the user due to carbon finance if received is also studied it is found that carbon finance could reduce the effective burden of shs to the user by 19 if carbon prices were 10 tco22 and no transaction costs were involved in getting the carbon revenues these benefits are also estimated for scenarios where transaction costs are incurred by the project proponent in getting the carbon benefits

the link between macroeconomic performance and variability in the uk abstract this paper examines the link between inflation output growth and their respective variabilities we employ a bivariate garch model which incorporates mean and level effects to investigate in a unified empirical framework all the possible interactions between the four variables we show that not only does variability affect performance but the latter influences the former as well specifically inflation has a positive impact on both variabilities

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

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