interest rates and money in the measurement of monetary policy over the last 25 years a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies in light of this work the federal reserve s recent policy of quantitative easing with its goal of affecting the supply of liquid assets appears to be a radical break from standard practice alternatively one could posit that the monetary aggregates when measured properly never lost their ability to explain aggregate fluctuations and for this reason represent an important omission from standard models and policy discussions in this context the new policy initiatives can be characterized simply as conventional attempts to increase money growth this view is supported by evidence that superlative divisia measures of money often help in forecasting movements in key macroeconomic variables moreover the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary

can money matter for interest rate policy in this paper it is shown that money can matter for macroeconomic stability under interest rate policy when transactions frictions are non negligible we develop a sticky price model with a shopping time function which induces the marginal utility of consumption to depend on the predetermined stock of money held at the beginning of the period equilibrium stability and uniqueness are then ensured by a passive interest rate policy whereas activeness is associated with an explosive equilibrium by reacting to changes in beginning of period real balances the central bank can restore stability interest rates further depend on lagged real balances even if the central bank acts in an entirely forward looking way as under discretionary optimization if the model is revised such that end of period money provides transaction services money can in principle be neglected for a stabilizing interest rate policy discretionary monetary policy is however likely to be associated with equilibrium indeterminacy which can be avoided if interest rates are set contingent on beginning of period real balances

harvests and business cycles in nineteenth century america most major american industrial business cycles from around 1880 to the first world war were caused by fluctuations in the size of the cotton harvest due to economically exogenous factors such as weather wheat and corn harvests did not affect industrial production nor did the cotton harvest before the late 1870s the unique effect of the cotton harvest in this period can be explained as an essentially monetary phenomenon the result of interactions between harvests international gold flows and high powered money demand under america s goldstandard regime of 1879 1914

the optimal level of social security benefits the optimal level of social security benefits depends on balancing the protection that these benefits offer to those who lack the foresight to provide for their own old age against the welfare costs of distorting economic behavior the primary such cost is the distortion in private saving the present paper derives the level of social security benefits that is optimal in three basic cases in the first section the paper derives the optimal level of benefits for an economy in which all individuals do not anticipate retirement at all and therefore do no saving the second and third sections then derive optimal benefits for two different definitions of incomplete myopia

global demographic trends and social security reform how sustainable are the current social security systems in the developed economies given the projected demographic trends the most recent literature has answered this question through dynamic general equilibrium models in a closed economy framework this paper provides a new quantitative benchmark of analysis for this question represented by a two region model south and north of the world economy where capital flows across regions the timing and the extent of the demographic transition and the associated economic forces shaping capital accumulation and equilibrium factor prices are very different in the two regions thus the projected paths of interest rate and wage rate in the north diverge substantially between closed and open economy we perform a wide range of policy experiments under both scenarios our main conclusion is that if one is interested in quantifying the path of the fiscal variables e g the value of the payroll tax needed to keep the social security system viable or to finance a transition towards a fully funded system then these two benchmarks yield similar results however if the focus is on quantifying the path of factor prices aggregate variables and ultimately welfare then the two approaches can diverge significantly

banking and interest rates in monetary policy analysis a quantitative exploration abstract the paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type the model is implemented quantitatively with a calibration based on us data it is reasonably successful in providing an endogenous explanation for substantial steady state differentials between the interbank policy rate and i the collateralized loan rate ii the uncollateralized loan rate iii the t bill rate iv the net marginal product of capital and v a pure intertemporal rate we find a differential of over 3 p a between iii and iv thereby contributing to resolution of the equity premium puzzle dynamic impulse response functions imply pro or counter cyclical movements in an external finance premium that can be of quantitative significance in addition they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4 p a also shocks to banking productivity or collateral effectiveness call for large responses in the policy rate

financial friction in an emerging economy abstract the objective of this study is to evaluate the role of the frictional domestic credit market in an emerging country by using a small open economy dsge model with a banking sector the calibration results show that the financial friction does not significantly influence the macroeconomic effects of the shocks to the domestic productivity foreign interest rate and export demand we also evaluate whether and how the trade and financial openness can influence the effects of the domestic financial shocks that in turn affect the supply of loans in the credit market we show that greater trade and financial openness can reduce the macroeconomic impacts of the domestic financial distress under a more open international capital market the capital outflow caused by the domestic financial shock does not lead to drastic exchange rate variation this helps dampen the adverse effects of the financial distress on the economy

interest rates inflation and federal reserve policy since 1980 this paper characterizes federal reserve policy since 1980 as one that actively manages short term nominal interest rates in order to control inflation and evaluates this policy using a dynamic stochastic sticky price model of the united states economy the results show that the fed s policy insulates aggregate output from the effects of exogenous demand side disturbances and by calling for a modest but persistent reduction in short term interest rates following a positive technology shock helps the economy to respond to supply side disturbances as it would in the absence of nominal rigidities

theoretical analysis regarding a zero lower bound on nominal interest rates this paper explores several issues concerning a possible zero lower bound zlb including its theoretical rationale the magnitude of effects of low sustained inflation on real interest rates the validity of analyzing monetary policy in models with no monetary variables and the dynamic stabilizing properties of taylor rules in a zlb context the most important argument however is that if the short nominal rate is immobilized at zero there nevertheless exists a route for monetary stabilization policy to be effective via the foreign exchange market its quantitative importance is examined in a calibrated optimizing open economy model

money and the natural rate of interest structural estimates for the united states and the euro area abstract we examine the role of money in three environments the new keynesian model with separable utility and static money demand a nonseparable utility variant with habit formation and a version with adjustment costs for holding real balances the last two variants imply forward looking behavior of real money balances with forecasts of future interest rates entering current portfolio decisions we conduct a structural econometric analysis of the u s and euro area economies fiml estimates confirm the forward looking character of money demand a consequence is that real money balances are valuable in anticipating future variations in the natural interest rate

the two pillars of the european central bank i interpret the european central bank s two pillar strategy by proposing an empirical model for inflation that distinguishes between the short and long run components of inflation the latter component depends on an exponentially weighted moving average of past monetary growth and the former on the output gap estimates for the 1971 2003 period suggest that money can be combined with other indicators to form the broadly based assessment of the outlook for future price developments that constitutes the ecb s second pillar however the analysis does not suggest that money should be treated differently from other indicators while money is a useful policy indicator all relevant indicators should be assessed in an integrated manner and a separate pillar focused on monetary aggregates does not appear necessary stefan gerlach

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

a market for renewable energy credits in the indian power sector abstract electricity generation from renewable energy sources in india has been promoted through a host of fiscal policies and preferential tariff for electricity produced from the same the fiscal policies include tax incentives and purchase of electricity generated through renewable energy sources the enactment of the electricity act 2003 the act has lent further support to renewable energy by stipulating purchase of a certain percentage of the power procurement by distribution utilities from renewable energy sources the renewable portfolio obligation as well as the feed in tariff for power procurement has been specified by a number of state electricity regulatory commissions sercs for the respective state under their jurisdiction a feed in tariff determined through a cost plus approach under a rate of return framework lacks incentive for cost minimisation and does not encourage optimal utilisation of renewable energy resources in the country such regulatory provisions differ across states the prevalent practice of fixing a renewable portfolio obligation along with cost based feed in tariffs disregards economic efficiency the paper proposes nationally tradable renewable energy credits scheme for achieving the targets set by the respective sercs as renewable portfolio obligation this would reduce the cost of compliance to a renewable portfolio obligation and would encourage efficient resource utilisation and investment in appropriate technologies the paper highlights its advantages and implementation issues this paper discusses regulatory developments for promotion of renewable energy in various indian states the paper also identifies a number of issues related to regulations concerning renewable portfolio obligation

monetary shocks and sticky wages in the u s great contraction a multi sector approach abstract we quantify the role of contractionary monetary shocks and nominal wage rigidities in the u s great contraction in contrast to conventional wisdom we find little increase in the economy wide real wage over 1929 33 although real wages rose significantly in some industries in the context of a two sector model with intermediates and nominal wage rigidities in one sector contractionary monetary shocks account for only a third of the fall in gdp intermediate linkages play an important role as the output decline without intermediates is almost a third larger at the trough the role of nominal wage rigidities beyond their interaction with monetary shocks is limited

reconsidering the role of money for output prices and interest rates abstract new keynesian models of monetary policy downplay the role of monetary aggregates in the sense that the level of output prices and interest rates can be determined without knowledge of the quantity of money this paper evaluates the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using a vector autoregression var shocks to monetary aggregates are identified by the restrictions suggested by new keynesian monetary models contrary to the theoretical predictions shocks to broad monetary aggregates have substantial and persistent effects on output prices and interest rates

a method for taking models to the data abstract this paper develops a method for combining the power of a dynamic stochastic general equilibrium model with the flexibility of a vector autoregressive time series model to obtain a hybrid that can be taken directly to the data it estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar us economy the stability of the real business cycle model s structural parameters and the performance of the hybrid model s out of sample forecasts

real balance effects timing and equilibrium determination this paper examines whether the existence and the timing of real balance effects contribute to the determination of the absolute price level as suggested by patinkin 1949 1965 and if they afiect conditions for local equilibrium uniqueness and stability i show that there exists a unique price level sequence that is consistent with an equilibrium under interest rate policy only if beginning ofperiod money yields transaction services predetermined real money balances can then serve as a state variable implying that interest rate setting must be passive a violation of the taylor principle for unique stable and non oscillatory equilibrium sequences on the contrary when the end of period money stock facilitates transactions the equilibrium displays nominal indeterminacy and equilibrium uniqueness requires an interest rate setting consistent with the taylor principle

the case for inflation stability abstract we evaluate the case for inflation stabilization in a new keynesian nns model that includes various frictions capital accumulation and a variety of shocks in such a model price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs we find that such an opportunity is of limited value and that a strong case for perfect inflation stabilization remains policies that tolerate a small amount of inflation variability may outperform perfect inflation targeting when capital adjustment costs are low and the monetary distortion is substantial but only if prices are very flexible

money in a theory of banking we introduce money in a model of banking in order to examine how open market operations can affect aggregate bank lending and output we see two important ways changes in money supply affect the banking system first by changing prices and interest rates it affects the wealth of demanders of real liquidity and thus the equilibrium production of liquid assets aggregate output and the health of the banking system second it changes the value of money as a means of payment and thus the attractiveness of moving from deposits to currency the demand for financial liquidity again this impacts the health of the banking system and thus bank lending and aggregate output we use this understanding to see how changes in money supply can create alleviate or be ineffective in banking crises

transactions cost and interest rate rules this paper evaluates quantitatively the effect of real money balances in a new keynesian framework money in our model facilitates transactions and is introduced through a transactions cost technology this technology acts like a distortionary consumption tax which varies endogenously with the nominal interest rate in this setup the resultant phillips curve becomes a function of the nominal interest rate our analysis has important policy implications first we find unlike woodford 2003 accounting for realbalance effects does not result in the policy maker s loss function having an interest rate smoothing term second we show that in the case of a temporary shock to productivity the optimal policy response under discretion is to allow for a trade off between inflation and the output gap this trade off arises endogenously in our model the quantitative effects on the macroeconomic variables are found to be significant

on the sources of macroeconomic stability in the euro area in the mid 1990s the euro area experienced a change in macroeconomic volatility around the same time at business cycle frequencies the correlation between inflation and money growth changed markedly turning from positive to negative distinguishing the periods pre and post 1994 we estimate a dynamic stochastic general equilibrium model with money for the euro area the model accounts for the salient facts we then perform several counterfactual exercises to assess the drivers of these phenomena the moderation of real variables was essentially due to relatively smaller shocks to investment wage markups and preferences the apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti inflationary and gradual monetary policy

direct effects of base money on aggregate demand theory and evidence abstract meltzer the transmission process working paper carnegie mellon university 1999a shows that real monetary base growth is a significant determinant of consumption growth in the us controlling for the short term real interest rate in this paper i show that the same property of base money holds for total output relative to trend or potential in both the us and the uk the standard optimizing is lm model cannot account for this result but i show that it can once the long term nominal interest rate is included in the money demand function because the long term real rate matters for aggregate demand the presence of the long term nominal rate in the money demand function increases the effect of nominal money stock changes on real aggregate demand when prices are sticky

role of targeted policies in mainstreaming renewable energy in a resource constrained electricity system a case study of karnataka electricity system in india india is aggressively pursuing its renewable energy capacity expansion goals targeted policies such as feed in tariff fit renewable purchase obligation rpo and renewable energy certificate rec are introduced to stimulate renewable energy capacity expansion as well as generation currently indian power utilities treat rpo targets as a cost burden and therefore there is prevalence of non compliance even other policies such as fit and recs in their present form have failed to influence increase in renewable electricity supply this has lead us to raise an important question whether these policies are adequate for building a cost effective renewable energy based low carbon electricity system for india in this paper we discuss the impact of above targeted policies in increasing the share of renewable electricity generation in the case of karnataka state electricity system various scenarios are developed and analysed using mixed integer programming model to study the impacts the results suggest that optimally managed fit and rec schemes can provide opportunities for utilities to benefit from reduced costs overall the above policies are inadequate and introduction of market based incentives which expand the scope of trading in renewable energy certificates are essential to achieve the desired objectives

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

social security and unsecured debt abstract in this paper we use a calibrated life cycle model to explore quantitatively ways of reducing the burden of social security in a world populated by both optimizing and rule of thumb consumers social security contributions force young households with upward sloping income profiles to save a sizeable portion of their income for retirement when their optimal consumption plan would likely have them either saving little or borrowing we first use household data to document that young households have accumulated social security contributions that are large relative to debt holdings then using a calibrated life cycle model we show that both allowing households to use social security wealth to pay off their debt and exempting young households from social security contributions but in both cases requiring higher contributions later mitigate many of the inefficiencies of social security from the perspective of life cycle financial planning specifically in our preferred experiment which exempts households whose heads are under 30 from making social security contributions we find that certainty equivalent consumption increases by 3 4 for optimizing households and by 3 3 for rule of thumb households

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

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 credit channel transmission mechanism and the nonlinear growth and welfare effects of inflation and taxes with the credit channel effect driven by the central bank s open market operations this paper s model easily gives rise to the nonlinear inflation growth nexus which is evidenced by a number of cross country empirical studies the threshold level of the inflation rate is found to be lower when tax rates are higher the presence of the credit channel effect also provides the rationale for setting positive and smaller than 1 tax rates on consumption labor income and capital income the optimal tax rates rise as the inflation target declines under a fiscal policy rule where labor and capital income taxes move proportionally to each other the optimal capital income tax rate could be higher than the optimal labor income tax rate under a sufficiently large central bank balance sheet the credit channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing this provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets jel e58 e62 o42

chained credit contracts and financial accelerators sufficiently high net worth of financial intermediaries fis is considered a necessary condition for financial and macroeconomic stability in this paper we explore why the net worth of fis is important as compared to that of nonfinancial firms using a dynamic general equilibrium model in which both fis and nonfinancial firms rely on costly external debt we find that an exogenous disruption of the fis net worth has a greater aggregate impact than does the same sized disruption of the nonfinancial firms net worth the key reason is that the net worth of the fis in the united states is small jel e22 e44 g21

a monetary explanation of the equity premium term premium and risk free rate puzzles this paper develops and estimates a monetary model that offers an explanation of some puzzling features of observed returns on equities and default free bonds the key feature of the model is that some assets other than money play a special role in facilitating transactions which affects the rate of return that they offer the model is capable of producing a low risk free rate a high equity premium and an average positive relationship between maturity and term premium for default free bonds the model s implications for the joint distribution of asset returns velocity inflation money growth and consumption growth are also compared to the behavior of these variables in the u s economy

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

monetary policy and the transaction role of money in the us the declining importance of money in transactions can explain the well known fact that u s interest rate policy was passive in the pre volcker period and active after 1982 we generalise a standard cashless new keynesian model woodford2003 by incorporating an explicit transaction role for money in the pre volcker period we estimate that money did play an important role and determinacy required a passive interest rate policy however after 1982 money no longer played an important role in facilitating transactions correspondingly the conventional view prevails and an active policy ensured equilibrium determinacy

wage or price based inflation alternative targets in optimal monetary policy rules abstract in this paper the optimality of a specific variant of monetary policy rules a la taylor is tested within a general equilibrium monetary model with both nominal and real rigidities the traditional taylor rule is amended by the inclusion of the growth rate of nominal wage or wage inflation nominal rigidities are inserted via quadratic adjustment costs for both prices and wages a la rotemberg 1982 sticky prices in the united states journal of political economy 90 1187 1211 and kim 2000 constructing and estimating a realistic optimizing model of monetary policy journal of monetary economics 45 329 359 cost of capital adjustment together with a positive steady state inflation rate allow the model to match the main empirical facts about us economy the model is solved by using a second order approximation around the non stochastic steady state as in kim et al 2008 calculating and using second order accurate solutions of discrete time dynamic equilibrium models journal of economic dynamics and control 32 11 3397 3414 the welfare metric is offered by the second order expansion of the utility function conditional to the non stochastic steady state the results show that wage inflation targeting is welfare improving when coupled with inflation targeting moreover optimal monetary rules include also a positive coefficient for output targeting as the need to smooth out quantity adjustments induced by real and nominal rigidities similar results occurs when both targets are in expected value one period ahead the model shows good in sample and out of sample properties

admissible monetary aggregates for the euro area we use the fleissig and whitney fleissig a r whitney g a 2003 a new pc based test for varian s weak separability conditions journal of business and economics statistics 21 1 133 144 weak separability test to determine admissible levels of monetary aggregation for the euro area we find that the euro area monetary assets in m2 and m3 are weakly separable and construct admissible divisia monetary aggregates for these assets we show that real growth of the admissible divisia aggregates enters the euro area is curve positively and significantly for the period from 1980 to 2005 out of sample we show that divisia m2 and m3 appear to contain useful information for forecasting euro area inflation

changes in the federal reserve s inflation target causes and consequences this paper estimates a new keynesian model to draw inferences about the behavior of the federal reserve s unobserved inflation target the results indicate that the target rose from 1 1 4 percent in 1959 to over 8 percent in the mid to late 1970s before falling back below 2 1 2 percent in 2004 the results also provide some support for the hypothesis that over the entire postwar period federal reserve policy has systematically translated short run price pressures set off by supply side shocks into more persistent movements in inflation itself although considerable uncertainty remains about the true source of shifts in the inflation target jel e31 e32 e52

a model of monetary policy shocks for financial crises and normal conditions in their classic 1999 paper monetary policy shocks what have we learned and to what end christiano eichenbaum and evans cee investigate one of the most widely used methods for identifying monetary policy shocks of its time unfortunately their approach is no longer viable at least not in its original form a major problem stems from the recent behavior of two key variables in their model the fed funds rate and non borrowed reserves we develop a new identification scheme that remedies these diculties but maintains the basic cee framework our empirical specification is motivated by a standard new keynesian dsge model augmented by a simple financial structure the model provides theoretical support for variables we use in place of certain variables that were used in the classic var approach outlined in cee one significant innovation is our use of divisia m4 the broadest monetary aggregate currently available for the united states as the policy indicator variable we obtain four major empirical results that support the use of a properly measured broad monetary aggregate as the policy variable first policy shocks have significant eects on output and on the price level even when an interest rate is included in our model contradicting the new keynesian argument that monetary aggregates are redundant second we develop a model that is not subject to the output price or liquidity puzzles common to this literature contradicting the view that using the interest rate as the policy indicator generally yields more reasonable responses than a monetary aggregate third during normal conditions policy shocks from our divisia based model have similar eects on variables to those found in the fed funds model of monetary policy and where there are dierences our model with divisia m4 obtains results that are more consistent with standard economic theory fourth our preferred specification produces plausible responses to a monetary policy shock in samples that include or exclude the recent financial crisis

intergenerational risk shifting through social security and bailout politics abstract this paper adopts a stochastic overlapping generations framework to analyze the allocation of aggregate financial risks under different social security systems and a majority voting rule we study whether there will be switches between pay as you go payg and fully funded ff systems in such an economy we show that in case of a negative aggregate shock low income young individuals will form a political coalition with the elderly to implement a payg system payg scheme is shown to persist even after a good aggregate shock if the system is redistributive enough

social security and risk sharing abstract in this paper we identify conditions under which the introduction of a pay as you go social security system is ex ante pareto improving in a stochastic olg economy with capital accumulation and land we argue that these conditions are consistent with realistic specifications of the parameters of the economy in our model financial markets are complete and competitive equilibria interim pareto efficient therefore a welfare improvement can only be obtained if agents welfare is evaluated ex ante and arises from an improvement in intergenerational risk sharing we also examine the optimal size of a given social security system as well as its optimal reform

risk sharing across generations without publicly owned equities abstract the u s social security trust fund currently invests in government bonds investing some of it instead in equities while continuing to pay social security benefits under existing rules would alter potentially improve the sharing of financial risks across non trading generations this paper shows that the same risk sharing can be achieved without direct government ownership of equities if instead the government places a linear and symmetric tax on risky private capital returns this equivalence is very robust and holds even if some agents are endogenously borrowing constrained

unemployment fears and deflationary spirals the interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features in isolation dampen them during recessions fears of unemployment stir up precautionary sentiments which induces agents to save more the additional savings may be used as investments in both a productive asset equity and an unproductive asset money but even a small rise in money demand has important consequences the desire to hold money puts deflationary pressure on the economy which provided that nominal wages are sticky increases wage costs and reduces firm profits lower profits repress the desire to save in equity which increases the fear of unemployment and so on this is a powerful mechanism which causes the model to behave differently from both its complete markets version and a version with incomplete markets but without aggregate uncertainty in contrast to previous results in the literature agents uniformly prefer non trivial levels of unemployment insurance

a new comparative approach to macroeconomic modeling and policy analysis in the aftermath of the global financial crisis the state of m acroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism macroeconomists in academia and policy institutions are blamed for relying too much on a particular class of macroeconomic models that did not sufficiently this paper propose s a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms macroeconomic model comparison projects have helped produce some very influenti al insights such as the taylor rule however they have been infrequent and costly because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings this paper provides a new comparative approach to model based research and policy analysis that enables individual researchers to conduct model comparisons easily frequently at low cost and on a large scale using this approach a model archive is built that incl udes many well known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies a computational platform is created that allows straightforward comparisons of models implications its application is illustrated by compa ring different monetary and fiscal policies across selected models researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development

real balance effects and monetary policy i introduction modern literature on monetary policy rules employs new keynesian optimizing models that do not explicitly include monetary aggregates see e g rotemberg and woodford 1997 clarida et al 1999 taylor 1999 in these models the demand for output derives from the log linearization of the standard euler equation characterizing household s saving decisions the real money stock does not enter the is relation and therefore monetary policy affects output and inflation only through its effect on the real interest rate when the nominal interest rate is the policy instrument it is not necessary to specify a money market equilibrium condition see romer 2000 the practice of neglecting monetary aggregates in monetary policy analysis has recently been questioned by meltzer 1999 mccallum 2001 and nelson 2002 2003 in particular mccallum 2001 points out that although no explicit term involving money appears in the standard new keynesian setup long run inflation can still be pinned down by the economy steady state nominal money growth rate moreover mccallum 2000 2001 andres et al 2001 kremer et al 2003 woodford 2003 ireland 2004a and collard and dellas 2005 analyze the case in which the resources used by consumers in conducting transactions are modeled by a nonseparable function of consumption and real money balances meltzer 1999 2001 argues that changes in real monetary base generate effects on real aggregate demand not summarized by the real interest rate on short term securities nelson 2003 emphasizes the role of money in the transmission mechanism both as a proxy for a whole spectrum of rates of return and as an indicator variable which contains information about the state of the economy the main aim of the present article is to provide additional microfoundations for an explicit role for money in the current macroeconomic debate in particular i derive a real balance effect that explicitly enters the is relation within an optimizing general equilibrium framework of the new keynesian type according to de scitovszky 1941 haberler 1946 pigou 1943 and patinkin 1965 a change in real money balances has an impact on the real financial wealth of consumers and therefore affects consumption and output notably this effect is not considered in traditional models there is in fact empirical evidence showing that real monetary base growth is a significant determinant of consumption and output gap in both the united states and in the united kingdom see chari et al 1995 meltzer 1999 nelson 2002 the present article extends the dynamic stochastic new keynesian setup with money in the utility function by introducing overlapping generations as modeled by yaari 1965 and blanchard 1985 there are good reasons to base the demand side of the economy on a discrete time stochastic monetary version of the yaari blanchard model first this kind of extension allows one to maintain the main characteristics of the so called new neoclassical synthesis that is forward looking behavior of optimizing agents and incomplete nominal adjustment of prices featured in new keynesian theories goodfriend and king 1997 second the derivation of the real balance effect does not require nonseparability in the utility function thus the implications are analytically more tractable 1 third my framework is more general because it includes the immortal representative agent setup as a particular case my analysis attempts to examine whether the presence of an explicit real balance effect in the is relation helps evaluate the role for money in designing monetary policy rules i focus on basic issues concerning the design of monetary policy rules specifically i investigate whether it is necessary for monetary policy to overreact to inflation by raising the nominal interest rate by more than the observed increase in inflation to rule out equilibrium multiplicity

sticky price models and the natural rate hypothesis abstract a major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state in this paper we estimate a dynamic optimizing business cycle model whose price setting behavior satisfies the natural rate hypothesis the price adjustment specifications we consider are the sticky information specification of mankiw and reis sticky information versus sticky prices a proposal to replace the new keynesian phillips curve quarterly journal of economics 117 1295 1328 and the indexed contracts of christiano et al nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 45 our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen consequently the alternative model specifications deliver similar estimates of the u s output gap series but the empirical behavior of the gap series differs substantially from standard gap estimates

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

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

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

quantitatively exploring the future of renewable portfolio standard in the korean electricity sector via a bottom up energy model abstract the republic of korea started to apply a new renewable energy policy renewable portfolio standard rps in 2012 but the policy has failed to obtain positive evaluation and some problems have arisen during the first two years in this study we have tried to investigate the current design operational mechanism of the policy to examine the reasons for its problems and to quantitatively predict future outlook for the examination and prediction we use the bottom up model approach which has not been commonly used for the rps policy but is usually utilized for evaluating specific policy options in an energy system therefore the main purpose of this study is not only to introduce a new approach for the exploration of the rps policy a scenario based quantitative analysis based on a bottom up energy system model but also to apply the approach into the policy in korea we develop a multi regional bottom up energy model and explicitly implement the mechanism of the policy in the model such as the transfer of tradable attribute renewable energy certificates recs the results of the model predict a serious disharmony of the current design of the policy under the national basic plan the optimistic fulfillment rate of recs in the entire mechanism will be around 66 in 2022 so the most regulated generators will suffer from the large shortfalls of recs and the total penalty for all regulated generators will be expected up to 1350 billion krw in 2022 we also diagnose the reasons of the disharmony as well as address some suggestions for its continued application as the korean case study we believe that the approach in this study can be utilized when policy makers design or amend the mechanism of rps with recs to help the policy operate efficiently and to prevent potential undesirable consequences

technology shocks and aggregate fluctuations in an estimated hybrid rbc model this paper contributes to the on going empirical debate regarding the role of the rbc model and in particular of technology shocks in explaining aggregate fluctuations to this end we estimate the model s posterior density using markov chain monte carlo mcmc methods within this framework we extend ireland s 2001 2004 hybrid estimation approach to allow for a vector autoregressive moving average varma process to describe the movements and co movements of the model s errors not explained by the basic rbc model the results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model s fit relative to the var and ar alternatives moreover despite setting the rbc model a more difficult task under the varma specification our analysis based on forecast error and spectral decompositions suggests that the rbc model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post war u s economy

money s role in the monetary business cycle a small structural model of the monetary business cycle implies that real money balances enter into a correctly specified forward looking is curve if and only if they enter into a correctly specified forward looking phillips curve the model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation maximum likelihood estimates of the modelos parameters take both these considerations into account but still suggest that money plays a minimal role in the monetary business cycle

the future of social security with an introduction by daniel l mcfadden the past and the present processes leading to social security legislation inform expectations regarding the future of social security and with international comparisons provide lessons to those who would learn them jel h55

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

the role of financial intermediaries in monetary policy transmission the recent financial crisis has stimulated theoretical and empirical research on the propagation mechanisms underlying business cycles in particular on the role of financial frictions many issues concerning the interactions between banking and monetary policy forced policy makers to redefine economic policies and motivated macroeconomists to focus on the implications of financial intermediation constraints for asset price fluctuations the behavior of non financial firms households governments and in turn for real macroeconomic performance this paper surveys research on the role of financial intermediaries and financial frictions in the transmission of monetary policy and discusses how to design both the new banking regulatory and supervisory structures and monetary policy in order to stabilize the economy it also serves as an introduction to this special issue

information variables for monetary policy in an estimated structural model of the euro area a small scale new keynesian model for the euro area is estimated with maximum likelihood under the assumptions of imperfect information and discretionary monetary policy the estimated parametrization of this widely used dynamic stochastic model unveils the monetary authorities objectives and the information content of two indicator variables monetary aggregates and real unit labour costs the results highlight a significant policy concern about interest rate smoothing and inflation almost no concern for output gap stabilization emerges regarding indicator variables unit labour costs provide information on potential output that is helpful for stabilization policy no useful information role emerges for monetary aggregates

estimating the evolution of money s role in the u s monetary business cycle we assess money s role in the post wwii u s business cycle by employing both fixed coefficient and rolling window bayesian estimations of a structural model of the business cycle with money our empirical evidence favors a specification with drifting parameters for money consumption nonseparability and the federal reserve s reaction to nominal money growth the role of money is estimated to have been important during the 1970s and declined afterward the omission of money produces severely distorted impulse response functions relative to the model with money money is found to be important in replicating the u s output volatility during the great inflation

renewable energy certificates recs in india a performance analysis and future outlook abstract well designed renewable energy re policies and their effective regulation is the key to promote re generation in the world renewable energy certificate rec mechanism is a market based policy instrument which facilitates renewable energy purchase obligations rpos in order to increase re generation in a country the recently conceived and implemented rec mechanism in india attempts to involve various stakeholders in an economically efficient manner and has been effective in its first year of operation the paper commences with the background and the genesis of rec mechanism in india it characterises the rec trading mechanism and analyses the performance of the rec market for the fy 2011 12 comparing the financial viability for sale of re by project developers in certain key states the paper shows that rec mechanism is more profitable than entering into a power purchase agreement ppa for sale of re at preferential tariff feed in tariffs thus the rec market which has attained a size of 2 3 billion inr in its first year of existence is forecasted to grow manifold in the future and the paper attempts to forecast the market size in near term further analysis of the rec market reveals that although there are inherent advantages of the rec mechanism over other methods of promoting growth of re the market is currently subject to various distortions and the paper suggests few steps for correcting these distortions by appropriate market re design the paper concludes that the rec market mechanism has gained momentum and can effectively promote re generation in an economically efficient manner with benefits to all stakeholders provided it is strictly implemented and continuous corrections are given in the right direction by the market regulator

why money growth determines inflation in the long run answering the woodford critique woodford 2007 argues that it is not appropriate to regard inflation in the steady state of new keynesian models as determined by steady state money growth woodford instead argues that the intercept term in the monetary authority s interest rate policy rule determines steady state inflation in this paper i offer an alternative interpretation of steady state behavior according to which it is appropriate to regard steady state inflation as determined by steady state money growth the argument relies on traditional interpretations of the central bank s power in the long run and appeals to model properties that are common to textbook and new keynesian analysis according to this argument the only way the central bank can control interest rates in the long run is via affecting inflation and its only means available for determining inflation is by determining the money growth rate

savings and portfolio choice in a two period two asset model we extend arrow s analysis of portfolio choice in a one period model to savings and portfolio choice in a two period model this abstract was borrowed from another version of this item

solving the price puzzle with an alternative indicator of monetary policy we identify the effects of monetary policy shocks on macroeconomic variables in vars using the divisia m4 measure of money as the policy indicator variable we obtain theoretically sensible responses whether or not a commodity price index is included thus we eliminate the well known empirical puzzles from the var by a novel choice in a policy variable rather than the usual attachment of an ad hoc variable

when does the cost channel pose a challenge to inflation targeting central banks abstract in a sticky price model where firms finance their production inputs there is both a lower and an upper bound on the central bank s inflation response necessary to rule out the possibility of self fulfilling inflation expectations this paper shows that real wage rigidities decrease this upper bound but coefficients in the range of those on the taylor rule place the economy well within the determinacy region however when there is time variation in the share of firms who finance their inputs i e markov switching then inflation targeting interest rate rules frequently result in indeterminacy even if the central bank also targets output adding a nominal growth target to the policy rule can often alleviate this indeterminacy and therefore anchor inflation expectations

social security investment in equities this paper explores the general equilibrium impact of social security portfolio diversification into private securities either through the trust fund or private accounts the analysis depends critically on heterogeneities in saving production assets and taxes limited diversification weakly increases interest rates reduces the expected return on short term investment and the equity premium decreases safe investment increases risky investment and increases a suitably weighted social welfare function however the effects on aggregate investment long term capital values and the utility of young savers hinges on assumptions about technology aggregate investment and long term asset values can move in opposite directions jel h55

introduction of renewable energy certificate in the indian scenario abstract generation deficit in india is in the range of 9 and the scenario is expected to get grimmer in the context of high growth rate of the country with peak power shortage as high as 15 2 source annual report fy08 mop the nation needs to harness all forms of generation including renewables which currently has a meager share of 8 of the total generation in the country at present shooting price of crude oil reaching up to 135 may 2008 per barrel along with increasing awareness and concerns about environment the stage seems to be set for an increased mix of renewable energy re into the overall energy requirement in the country keeping the concern for environment and energy security for the country in mind government of india has been putting emphasis on promotion of renewable energy sources central and state government policies have always been instrumental in the propagation of capacity additions in renewable energy power one of the main aims of these policies has been on increasing the private sector participation in this sector in the pre reform period the state governments took policy decisions regarding financial incentives buy back tariff and other measures targeting investment in renewable energy however the state electricity regulatory commissions sercs are now responsible for many of these tasks sercs have come up with a host of initiatives inline with their functions laid down in the electricity act 2003 to increase the share of renewable energy inside their respective states despite the efforts of sercs large potential of renewable energy generation remains untapped there is lack of clarity on how to promote renewable energy generation inside states which are not having significant renewable energy generation potential this paper explores the way in which sercs can introduce measures to further promote renewable energy generation inside the country we discuss in detail the framework to promote renewable energy through a framework which puts into place renewable purchase obligation rpo mechanism the framework includes setting of rpo targets provisions for a surcharge levied upon non compliance of rpo targets and also a mechanism to meet rpo through trading of certificates

does money matter for the identification of monetary policy shocks a dsge perspective this paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard dsge model considering svar models in which either the interest rate is predetermined for money or money and the interest rate are simultaneously determined two dsge models are estimated by minimum distance estimation the estimation results reveal that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption in addition the estimated monetary policy rule is sensitive to the identification scheme this suggests that the way money is introduced in the identification scheme is not neutral for the estimation of dsge models c 2010 elsevier b v all rights reserved

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

money in an estimated business cycle model of the euro area this article examines the role of money in a small scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood the model allows for both intertemporal and intratemporal non separability in preferences we find first that real balances do not affect the marginal utility of consumption second money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price output and interest rates fluctuations third the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations

how sticky is sticky enough a distributional and impulse response analysis of new keynesian dsge models in this paper we add to the literature on the assessment of how well data simulated from new keynesian dynamic stochastic general equilibrium dsge models reproduce the dynamic features of historical data in particular we evaluate sticky price sticky price with dynamic indexation and sticky information models using impulse response and correlation measures and via implementation of a distribution based approach for comparing possibly misspecified dsge models using simulated and historical inflation and output gap data one of our main findings is that for a standard level of stickiness i e annual price or information adjustment the sticky price model with indexation dominates other models we also find that when a lower level of information and price stickiness is used i e bi annual adjustment there is much less to choose between the models see bils and klenow 2004 for evidence in favor of lower levels of stickiness this finding is due to the fact that simulated and historical densities are much closer under bi annual adjustment

what can we learn from the implementation of monetary and macroprudential policies a systematic literature review the emergence of macroprudential policies implemented by central banks as a means of promoting financial stability has raised many questions regarding the interaction between monetary and macroprudential policies given the limited number of studies available this paper sheds light on this issue by providing a critical and systematic review of the literature to this end we divide the theoretical and empirical studies into two broad channels of borrowers consisting of the cost of funds and the collateral constraint and financial intermediaries consisting of risk taking and payment systems in spite of the existing ambiguity surrounding coordination issues between monetary and macroprudential policies it is argued that monetary policy alone is not sufficient to maintain macroeconomic and financial stability hence macroprudential policies are needed to supplement monetary in addition we find that the role of the exchange rate is critical in the implementation of monetary and macroprudential policies in emerging markets while volatile capital flows pose another challenge in so far as how the arrangement of monetary and macroprudential policies varies across countries key theoretical and policy implications have been identified

pension plan funding technology choice and the equity risk premium in this paper the impact of lazear contracts with defined benefit pensions on aggregate technology composition and the aggregate risk premium is examined in the presence of capital market constraints affecting workers defined benefit pensions bias the economy towards risk free production leveraging the risky technology relaxes the constraints and results in more risky production and a fall in the aggregate risk premium this effect holds with risky debt and low pension shortfall risk but breaks down with high pension shortfall risk a key prediction is that as lazear contracts become less common risky production will increase and the aggregate risk premium will fall

the effects of investing social security funds in the stock market when fixed costs prevent some households from holding stocks with fixed costs of participating in the stock market consumers with high income will participate in the stock market but consumers with lower income will not participate if a fully funded defined contribution social security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita consumers who save but do not participate in the stock market will increase their consumption thereby reducing saving and capital accumulation calibration of a general equilibrium model indicates that this policy could reduce the aggregate capital stock substantially by about 50 cents per capita