banking in computable general equilibrium economies abstract in this paper we develop a computable general equilibrium economy that models the banking sector explicitly banks intermediate between households and between the household sector and the government sector households borrow from banks to finance their purchases of houses and they lend to banks to save for retirement banks pool households savings and they purchase interest bearing government debt and non interest bearing reserves we use this structure to answer two sets of questions one normative in nature that evaluates the welfare costs of alternative monetary and tax policies and one positive in nature that studies the real effects of following a procyclical interest rate policy rule

capital inflows financial structure and housing booms we use a panel var to study the effect of shocks to capital inflows which are identified using sign restrictions on the housing market in oecd countries to explore how effects of these shocks change with the structure of the mortgage market and the degree of mortgage securitization we allow the var coefficients to vary with mortgage market characteristics our results indicate that capital inflow shocks have a significant and positive effect on real house prices real credit available to the private sector and real residential investment the responses of these variables are stronger in countries with more developed mortgage markets and in countries where securitization is allowed

capital controls and monetary policy in sudden stop economies abstract the dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies this paper studies the benefits of capital controls and monetary policy in a small open economy with financial frictions nominal rigidities and sudden stops without commitment the optimal monetary policy should sharply diverge from price stability the policymakers will also tax capital inflows in a crisis but such taxes may be welfare reducing with commitment capital controls involve a mix of current capital inflow taxes and future capital flow subsidies the optimal policy will never involve macro prudential capital inflow taxes or a departure from price stability whether or not commitment is available

the future of macroeconomics macro theory and models at the bank of england abstract the adoption as policy models by central banks of representative agent new keynesian dynamic stochastic general equilibrium models has been widely criticised including for their simplistic micro foundations at the bank of england the previous generation of policy models is seen in its 1999 medium term macro model mtmm instead of improving that model to correct its considerable flaws many shared by other non dsge policy models such as the federal reserve s frb us it was replaced in 2004 by the dsge based beqm though this clearly failed during and after the global financial crisis it was replaced in 2011 by the dsge compass complemented by a suite of models we provide a general critique of dsge models for explaining forecasting and policy analyses at central banks and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory rather than seeking to impose simplistic and unrealistic theory

national macroprudential policies in the euro area flexibility vs supervision in this paper i shed some light on a much discussed topic in the policy debate should national macroprudential policies be supervised by a supranational entity in a monetary union to do so i develop a two country dsge monetary union model which i calibrate to the core and periphery regions of the euro area monetary policy is set by the ecb while macroprudential policies based on the loan to value ratio ltv are set nationally results show that given that the economy in the periphery is more leveraged macroprudential policies need to be more aggressive in that region i also find that when ltv policies are set independently in a non coordinated manner by each authority albeit being beneficial for both countries and for the union as a whole welfare gains are not as high as when they are coordinated and supervised by a separate body

household debt consumption and inequality abstract this paper examines the link between household credit shocks consumption and income inequality at the national level empirically we use country specific var models to estimate the dynamic responses of aggregate consumption to household credit shocks we then show in cross country regressions that the consumption response is more sensitive to such shocks in countries with higher levels of inequality even after controlling for financial development theoretically we construct and simulate a dynamic model based on the effect of inequality on the incidence of credit constraints to illustrate potential causal mechanisms

housing market heterogeneity in a monetary union this paper studies the implications of cross country housing market heterogeneity in a monetary union for both shock transmission and welfare i develop a two country new keynesian general equilibrium model with housing and collateral constraints to explore this issue the conventional wisdom is that welfare would be higher in a monetary union if mortgage markets were homogeneous this paper shows instead that welfare is higher only when homogenization does not result in higher aggregate volatility because of financial accelerator effects or does not redistribute too much wealth from borrowers to savers

monetary policy and investment dynamics evidence from disaggregate data we use disaggregated data on the components of private fixed investment pfi to estimate industry level responses of real investment and capital prices to unanticipated monetary policy the response functions derive from a restricted large scale var estimated over 1959 2007 our results point to significant cross sector heterogeneity in the behavior of pfi prices and quantities for assets belonging to the equipment category of fixed investment we find that quantities rather than prices absorb most of the fallout from a policy shock by contrast the price effects tend to be higher and the output effects lower for nonresidential structures

bank capital shocks and countercyclical requirements implications for banking stability and welfare abstract this paper incorporates anticipated and unanticipated shocks to bank capital into a dsge model with a banking sector we apply this model to study basel iii countercyclical capital requirements and their implications for banking stability and household welfare we introduce three different countercyclical capital rules the first countercyclical capital rule responds to credit to output ratio the second countercyclical rule reacts to deviations of credit to its steady state and the third rule reacts to credit growth the second rule proves to be the most effective tool in dampening credit supply housing demand and household debt as well as in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio after conducting a welfare analysis we find that the second rule outranks the other ones followed by the first rule the baseline and the third rule respectively in terms of welfare accumulation

international business cycles and financial frictions abstract in this study i build a two country dsge model to investigate the impact of financial integration on business cycle co movements with financial frictions in this model the investor can borrow but faces a collateral constraint that is tied to the value of her capital and real estate holdings i show quantitatively that the degree of financial integration and real exchange rate adjustment are important for understanding business cycle synchronization under different types of shocks with the technology shock greater financial integration leads to lower cross country correlations while with the financial shock greater financial integration leads to stronger cross country correlations these findings are consistent with the empirical evidence from the literature

heterogeneous expectations boom bust housing cycles and supply conditions a nonlinear economic dynamics approach abstract we combine a standard stock flow housing market model incorporating explicit relationships between house prices the housing stock and the rent level with a parsimonious expectation formation scheme of housing market investors reflecting an evolving mix of extrapolative and regressive expectation rules the model results in a two dimensional discrete time nonlinear dynamical system based on realistic parameters the model is able to generate endogenous boom bust housing market dynamics with lasting periods of overvaluation and overbuilding we thus exploit our model to investigate how real forces in particular supply conditions interact with expectations driven housing market fluctuations

housing markets consumption and financial liberalisation in the major economies abstract this paper analyses the implications of relaxing credit restrictions in housing finance markets a theoretical model of the interaction of financial and housing markets and forward looking agents is developed the effects of financial liberalisation in the model are analysed and evidence from the u s a and u k on the impact of easing credit restrictions is presented estimates are also made of the degree to which credit restrictions may bind on households in those countries where the range of mortgage products on offer is still more limited than in the u k and u s a simulations are undertaken to gauge the effect on consumption saving and bequests of wealth of possible future convergence in national systems of housing finance

financial intermediation house prices and the welfare effects of the u s great recession abstract this paper quantifies the welfare costs of the great recession in the united states and their distribution between borrowing and saving households we use a calibrated dynamic general equilibrium model with shocks to aggregate income and to the financial intermediation sector the model matches the boom bust cycle in house prices the dynamics of household leverage and the increase in inequality of wealth observed in the u s after 2007 we find large welfare costs for financially constrained households the borrowers savers instead benefited from a redistribution of housing wealth due to the de leveraging of borrowers caused by the plunge in house prices this redistribution mechanism was exacerbated by the financial intermediation shock we also show that the welfare costs for borrowers would have been lower if aggregate leverage had remained at pre 2001 levels

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

do central banks react to house prices we estimate the federal reserve s the bank of england s and the bank of japan s responses to house prices we show that generalized method of moments estimates of a taylor rule augmented with house prices are biased and dispersed we then use full information methods and estimate the policy rule together with a var for the nonpolicy variables these estimates are also biased we propose an alternative approach and estimate a dynamic stochastic general equilibrium model embedded with a monetary rule with a direct response to house prices we find that house prices played a separate role in the reaction functions of these central banks

addressing endogeneity in aggregate logit models with time varying parameters for optimal retail pricing abstract it is well known that price endogeneity is a severe problem in demand models for market level data e g aggregate logit models because it leads to biased estimates and therefore incorrect managerial implications if the price parameter varies over time as is usually the case the relevance of the issue increases because standard methods to correct endogeneity biases e g generalized method of moments fail this paper presents a control function approach as a remedy a comprehensive simulation study demonstrates this method s suitability such that addressing endogeneity with the control function approach is the best choice moreover addressing the endogeneity problem incorrectly may be even more harmful than simply ignoring it to further illustrate the control function approach we analyze the demand for canned tuna using aggregate retailer level data here all utility parameters vary over time and price endogeneity is indeed an issue effectively addressing price endogeneity correct has positive economic consequences a normative model analysis reveals that implementing the control function approach yields a 3 increase in retailer profits

requiem for the representative consumer aggregate implications of microeconomic consumption behavior macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches either to model microeconomic consumption behavior carefully and then to aggregate or to thoroughly understand the behavior of a representative consumer in general equilibrium then to introduce microeconomic risk and heterogeneity the broad conclusion from the bottom up approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior stephen p zeldes 1989 angus s deaton 1991 christopher d carroll 1992 the broad conclusion from the top down approach has been that precautionary saving is of little importance in determining the aggregate capital stock s rao aiyagari 1994 per krusell and anthony a smith 1998 leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes this paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts it produces behavior very different in important respects from that produced by the representative agent economy this leads to the conclusion that for many purposes the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts this abstract was borrowed from another version of this item

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

a characterization of ramsey equilibrium abstract consider a perfect foresight equilibrium model with a single capital good a borrowing constraint and many infinitely lived households with fixed but different discount factors the steady state capital stock is held by the most patient household quart j econ 95 1980 375 382 econ j 38 1928 543 559 an example shows the total capital can exhibit an equilibrium cycle in contrast to the stability property of the one household case in the example only the most patient household saves and his income deceases in capital we give a condition implying income is increasing in capital and use it to show any equilibrium converges to the steady state

developments in implementable retailing research abstract a favorable image and a convenient location are essential to attract customers into a store possibly with the benefit of retailer advertising once inside the customer s buying decision will be greatly influenced by the products on display their prices and other promotions the ultimate profitability for the retailer will also depend on the efficiency of the operations advances in these areas are reviewed through twenty four publications in the last five years with references back to six earlier papers

asset pledgeability and international transmission of financial shocks abstract this paper studies the international transmission of pledgeability shocks as the recent crisis involved a negative shock to the pledgeability of assets the paper develops a two country portfolio model with leveraged investors that incorporates this type of shock and a solution approach for the corresponding portfolio choice problem this approach captures the effect of pledgeability on asset risk premiums the paper finds that the equilibrium portfolios play a heightened role as transmission channels moreover by complementing the effect of productivity shocks under borrowing constraints the pledgeability shocks improve the fit of an otherwise standard international macroeconomic model for the g7 countries especially during crises

home is where the equity is mortgage refinancing and household consumption applying a permanent income model with exogenous liquidity constraints and mortgage behavior household refinancing when mortgage interest rates are historically high and rising a persistent empirical puzzle is explained using data from the panel study of income dynamics households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25 more likely to refinance 1991 94 on average such liquidity constrained households converted over two thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted 1991 94 producing an estimated expenditure stimulus of at least 28 billion

cross country spillovers from macroprudential regulation reciprocity and leakage abstract in a globally interconnected banking system there can be spillovers from domestic macroprudential policies to foreign banks and vice versa for example through the presence of foreign branches in the domestic economy the lack of reciprocity of some macroprudential instruments may result in an increase in bank flows to those banks with lower regulatory levels a phenomenon known as leakage this may decrease the effectiveness of macroprudential policies in the pursuit of financial stability to explore this topic i consider a two country dsge model with housing and credit constraints borrowers can choose whether to borrow from domestic or foreign banks macroprudential policies are conducted at a national level and are represented by a countercyclical rule on the loan to value ratio results show that when there are some sort of reciprocity agreements on macroprudential policies across countries financial stability and welfare gains are larger than in a situation of non reciprocity an optimal policy analysis shows that in order to enhance the effectiveness of macroprudential policies reciprocity mechanisms are desirable although the foreign macroprudential rule does not need to be as aggressive as the domestic one

investment behavior observable expectations and internal funds we use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending we find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow even for firms typically thought to be liquidity constrained these results have two key implications first fundamentals may be more important for investment spending than would be suggested by the results to date from investment q models second the positive cash flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints jel d92 e22

when do price thresholds matter in retail categories marketing literature has long recognized that brand price elasticity need not be monotonic and symmetric but has yet to provide generalizable market level insights on threshold based price elasticity asymmetric thresholds and the sign and magnitude of elasticity transitions this paper introduces smooth transition regression models to study threshold based price elasticity of the top 4 brands across 20 fast moving consumer good categories threshold based price elasticity is found for 76 of all brands 29 reflect historical benchmark prices 16 reflect competitive benchmark prices and 31 reflect both types of benchmarks the authors demonstrate asymmetry for gains versus losses on three levels the threshold size and the sign and the magnitude of the elasticity difference interestingly they observe latitude of acceptance for gains compared to the historical benchmark but saturation effects in most other cases moreover category characteristics influence the extent and the nature of threshold based price elasticity while individual brand characteristics impact the size of the price thresholds from a managerial perspective the paper illustrates the sales revenue and margin implications for price changes typically observed in consumer markets

homeownership informality and the transmission of monetary policy cross country aggregate data exhibits a strong positive relationship between the size of the informal employment and aggregate homeownership rates we investigate this empirical observation using a cash in advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates specifically we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short term cash usage and avoid periodic rental payments when i informality is associated with constrained business investment finance and ii inflation expectations are high our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets

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

is housing collateral important to the business cycle evidence from china abstract this paper investigates whether housing collateral is important to the business cycle in china we develop two models one without housing collateral as benchmark and one variant allowing for it indirect inference procedure tests these two models compatibility with the data we find that the benchmark model passes the test while the collateral model is strongly rejected according to the benchmark model shocks from the housing market have limited impact on the chinese business cycle by contrast the exogenous spending shock from government and net exports the monetary policy shock and the goods sector cost productivity shock all in turn most likely connected to world business cycle shocks especially the global financial crisis are found to be the main drivers

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

mortgage debt consumption and illiquid housing markets in the great recession using a model with housing search endogenous credit constraints and mortgage default this paper accounts for the housing crash from 2006 to 2011 and its implications for aggregate and cross sectional consumption during the great recession left tail shocks to labor market uncertainty and tighter down payment requirements emerge as the key drivers an endogenous decline in housing liquidity amplifies the recession by increasing foreclosures contracting credit and depressing consumption balance sheets act as a transmission mechanism from housing to consumption that depends on gross portfolio positions and the leverage distribution low interest rate policies accelerate the recovery in housing and consumption

consumer price sensitivity in the retail industry latitude of acceptance with heterogeneous demand abstract estimating the effect of price changes on demand is an essential task for retailers this study proposes a methodology based on consumer utility for modeling the price thresholds phenomenon that allows for threshold asymmetry incorporates consumer heterogeneity and uses weekly aggregated brand level data unlike other studies based on consumer utility models which generate results only for the price elasticity of market share a methodology for estimating price elasticity of demand is also included data on fast moving goods detergents toilet paper soft drinks meats liquid juices and yogurts supplied by a major retail chain are used to demonstrate the existence of price thresholds and their effects on price elasticity in every case it was found that within the thresholds or latitude of acceptance consumers are relatively less sensitive to price variations while beyond them a higher sensitivity was observed in some cases a product brand was classified as inelastic within the latitude of acceptance and elastic outside of it

mergers with differentiated products the case of the ready to eat cereal industry traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products i discuss an alternative which consists of demand estimation and the use of a model of postmerger conduct to simulate the competitive effects of a merger i estimate a brand level demand system for ready to eat cereal using supermarket scanner data and use the estimates to 1 recover marginal costs 2 simulate postmerger price equilibria and 3 compute welfare effects under a variety of assumptions the methodology is applied to five mergers two of which occurred and for which i compare predicted to actual outcomes

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

the term structure of interest rates with housing abstract this paper develops a general equilibrium model to study the link between the amount of capital invested in housing assets and the term structure of interest rates in the model the production of housing assets is irreversible and housing assets can be used as collateral for borrowing funds agents decisions about consumption and investments in housing and non housing assets generate a time varying market price of risk that drives the dynamics of the term structure the calibration to u s data using the simulated method of moments technique captures the dynamics of consumption and the short and long term interest rates

empirical generalizations from reference price research considerable theoretical justification for consumers use of psychological reference points exists from the research literature from a managerial perspective one of the most important applications of this concept is reference price an internal standard against which observed prices are compared in this paper we propose three empirical generalizations that are well supported in the marketing literature first there is ample evidence that consumers use reference prices in making brand choices second the empirical results on reference pricing also support the generalization that consumers rely on past prices as part of the reference price formation process third consistent with other research on loss aversion consumers have been found to be more sensitive to losses i e observed prices higher than reference prices than gains we also propose topics for further research on reference prices

subprime borrowers securitization and the transmission of business cycles a growing literature i e jaffee lynch richardson and van nieuwerburgh 2009 acharya and schnabl 2009 argues that securitization improves financial stability if the securitized assets are held by capital market participants rather than financial intermediaries i construct a quantitative macroeconomic model with a novel specification for mortgage backed securities mbs to evaluate this claim my findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets in the presence of large negative housing preference shocks the drop in output in the first year after the shock is halved if subprime mbs are purchased by non financial agents rather than held by banks less

a monetary business cycle model for india a new keynesian monetary business cycle model is constructed to study why monetary transmission in india is weak our models feature banking and financial sector frictions as well as an informal sector the predominant channel of monetary transmission is a credit channel our main finding is that base money shocks have a larger and more persistent effect on output than an interest rate shock as in the data the presence of an informal sector hinders monetary transmission contrary to the consensus view financial repression in the form of a statutory liquidity ratio and administered interest rates does not weaken monetary transmission

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

the credit view old and new recent writings in the so called credit view focus on binding finance constraints of macroeconomic activity which arise from the incomplete substitutability of bank credit and from changes in borrowers net worth they criticize the standard approaches in the money view for not taking full account of the observable effects of monetary restrictions on real activity in this paper the new credit view is contrasted with older macroeconomic theories that placed special emphasis on the banks systemic potential to expand credit beyond planned saving the comparative discussion of the underlying arguments about bank behaviour about the non neutrality of credit money and about the transmission of monetary policy impulses reveals some shortcomings in the new view history helps moreover to set the conventional confrontations of the credit view and the money view in perspective jel classification b22 e32 e44 e51 e52

the transmission of monetary policy through redistributions and durable purchases this paper studies a redistribution channel for the transmission of monetary policy using a tractable olg setting in which the government is a net debtor we show that standard open market operations omo conducted by central banks have signi cant revaluation eects that alter the level and distribution of wealth in the economy and the real interest rate expansionary omo generate a negative wealth eect the private sector as a whole is a net creditor to the government increasing households incen tives to save for retirement and pushing down the real interest rate this in turn leads to a substitution towards durables generating a temporary boom in the durable good sector with search and matching frictions a form of productive investment is added to the model and the fall in interest rates causes an increase in labour demand raising aggregate employment the mechanism can mimic the empirical responses of key macroeconomic variables to monetary policy interventions the model shows that dierent monetary interventions e g omo versus helicopter drops can have sharply dierent eects on activity

an empirical analysis of latitude of price acceptance in consumer package goods scanner panel data analyses for sweetened and unsweetened drink categories with four brands in each support the presence of a region of price insensitivity around a reference price the analyses also suggest that consumers with higher average reference price have a wider latitude of price acceptance consumers with a higher frequency of purchase i e shorter average interpurchase time interval are found to have a narrower latitude of price acceptance because they are more aware of the range of price distributions finally consumers with a higher average brand loyalty have a wider latitude of price acceptance demonstrating greater tolerance of price fluctuations

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

the response of asset prices to monetary policy shocks stronger than thought standard macroeconomic theory predicts rapid responses of asset prices to monetary policy shocks small scale vector autoregressions vars however often find sluggish and insignificant impact effects using the same high frequency instrument to identify monetary policy shocks we show that a large scale dynamic factor model finds overall stronger and quicker asset price reactions compared to a benchmark var both on euro area and us data our results suggest that incorporating a sufficiently large information set is crucial to estimate monetary policy effects

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

home equity mobility and macroeconomic fluctuations how does a fall in house prices affect real activity this paper presents a business cycle model in which a decline in house prices reduces geographical mobility creating distortions in the labor market this happens because homeowners face declines in their home equity levels after which it becomes more difficult to provide the down payment required for a new mortgage loan unemployed homeowners therefore turn down job offers that would require them to move the model explains joint cyclical patterns in housing and labor market aggregates as well as the puzzling breakdown of the u s beveridge curve that occurred during 2009

permanent income liquidity and expenditure on automobiles evidence from panel data several recent papers have tested the permanent income cum rational expectations hypothesis using data on nondurable or semidurable consumption we show how this approach can be extended to the case of durables an application to panel data on automobile expenditures reveals no evidence against the permanent income hypothesis this result is unchanged in subsamples segregated by family holdings of liquid assets

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

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

optimal monetary and macroprudential policy in a currency union abstract the financial crisis proved strikingly that financial frictions play a crucial role for system risk and policymakers have overlooked financial stability the obvious candidate for addressing financial stability is macroprudential policy in this paper we study the optimal ramsey monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks the monetary and macroprudential instruments are modeled as independent tools with a union wide macroprudential tool full stabilization on the aggregate level is possible but welfare losses due to fluctuations in relative variables prevail with country specific macroprudential tools full stabilization of shocks is always possible but as a rule not optimal evaluating the performance of different policy regimes shows that the additional welfare gains from having country specific macroprudential tools are small and vanish as the ability of the central bank to commit decreases

consumer price and promotion expectations an experimental study the authors report results from a controlled experiment designed to investigate the impact of a brand s price promotion frequency and the depth of promotional price discounts on the price consumers

does outsourcing reduce wages in the low wage service occupations evidence from janitors and guards outsourcing of labor services grew substantially during the 1980s and 1990s and was associated with lower wages fewer benefits and lower rates of unionization the authors focus on two occupations for which they can identify outsourcing in those two decades using industry and occupation codes janitors and guards across a wide array of specifications they find that the outsourcing wage penalty ranged from 4 to 7 for janitors and from 8 to 24 for guards their findings on health benefits mirror those on wages evidence suggests that the outsourcing penalty was not due to compensating differentials for higher benefits or lower hours skill differences or the types of industries that outsourced rather outsourcing seems to have reduced labor market rents for workers especially for those in the upper half of the occupational wage distribution industries with higher historical wage premia were more likely to outsource service work

on the amplification role of collateral constraints abstract this letter explores the role of costly liquidation of the collateralized asset in a stochastic version of the kiyotaki and moore 1997 model we document that the degree of inefficiency in the debt enforcement procedure plays a key role in the endogenous amplification of productivity shocks generated by collateral constraints

maximizing profit of a food retailing chain by targeting and promoting valuable customers using loyalty card and scanner data abstract in this paper we set up a house of profit model an approach of maximizing profit of a food retailing chain by targeting and promoting valuable customers our model combines segmentation analysis of households using loyalty card and scanner data price and promotion elasticity analysis simulation of effects of pricing and promotion price and promotion optimization to maximize profit these components are well known in the literature and each of them has received considerable independent study however in this study we combine each of these components into one consistent application orientated model we then demonstrate using panel data that the combination has a synergic effect on the efficiency of estimation and the maximization of profit e g price and promotion elasticity estimation is improved by conducting it within market segments rather than across an entire hetereogeneous population these estimates are further improved by incorporating pass through a functional relationship between a retailer s unit prices and unit costs

monetary policy housing rents and inflation dynamics in this paper we study the effect of monetary policy shocks on housing rents our main finding is that in contrast to house prices housing rents increase in response to contractionary monetary policy shocks we also find that after a contractionary monetary policy shock rental vacancies and the homeownership rate decline this combination of results suggests that monetary policy may affect housing tenure decisions own versus rent in addition we show that with the exception of the shelter component all other main components of the consumer price index cpi either decline in response to a contractionary monetary policy shock or are not responsive these findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component we find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation such as the cpi and the price index for personal consumption expenditures but have higher standard deviations and react more to monetary policy shocks finally we show that the response of housing rents accounts for a large proportion of the price puzzle found in the literature

macroprudential policy and imbalances in the euro area abstract since its creation the euro area suffered from imbalances between its core and peripheral members this paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region to this end we build a two economy macrofinancial model and simulate the effects of macroprudential policy regulating the loan to value ratio when the core and the periphery are exposed to asymmetric shocks we find that macroprudential policy is able to substantially lower the amplitude of credit and output fluctuations in the periphery however for the policy to be effective it should be decentralized very similar conclusions hold when welfare is considered as the optimality criterion

commercial use of upc scanner data industry and academic perspectives the authors report the findings from an exploratory investigation of the use of upc scanner data in the consumer packaged goods industry in the u s the study examines the practitioner community s view of the use of scanner data and compares these views with academic research forty one executives from ten data suppliers packaged goods manufacturers and consulting firms participated in wide ranging in person interviews conducted by the authors the interviews sought to uncover key questions practitioners would like to answer with scanner data how scanner data is applied to these questions and the industry s perspective regarding the success that the use of scanner data has had in each area the authors then compare and contrast practitioners views regarding the resolution of each issue with academic research this produces a 2 2 classification of each question as resolved or unresolved from the perspectives of industry and academia along the diagonal of the 2 2 issues viewed as unresolved by both groups are important topics for future research issues deemed resolved by both groups are correspondingly of lower priority in the off diagonal cells industry and academics disagree these topics should be given priority for discussion information exchange and possible further research practitioners reported that scanner data analysis has had the most success and been most widely adopted for decision making in consumer promotions i e coupons trade promotions and pricing for example logit and regression models applied to scanner data have revealed very low average consumer response to coupons which has directly led to reduced couponing activity managers also reported high levels of comfort with and impact from analyses of trade promotions and price elasticities while industry views most of the issues in these areas to be resolved academic research raises concerns about a number of practices in common commercial use these include price threshold analysis and trade promotion evaluation using baseline and incremental sales in product strategy advertising and distribution management practitioners reported that the use of scanner data has had more limited development success and impact in the case of new product decisions scanner data use has been slow to develop due to the inherent limitations of historicaldata for these decisions and a heavy reliance on traditional primary research methods in advertising scanner data is widely analyzed with models but confusion among practitioners is very high due to controversies about methods e g what level of data aggregation is best and conflicting results in distribution and retail management scanner data use has tremendous potential but a mixed track record to date thus practitioners view the use of scanner data as unresolved for most issues in product strategy advertising and distribution this view is largely though not entirely consistent with academic research which has only begun to address many of the key questions raised by practitioners in light of the large number of unresolved issues and mixed record of scanner data use to date the authors offer aseries of specific recommendations for immediate and long term research priorities that are likely to have the greatest impact on commercial utilization of upc scanner data topics of immediate priority include price thresholds and gaps baseline and incremental sales base price elasticity competitive reactions measurement of advertising effects management of brand equity rationalization of product assortments and category management long term priorities include a greater emphasis on profitability versus sales or market share developing prescriptive models versus descriptive models and the need for industry standards

measuring cross category price effects with aggregate store data our objective is to understand the cross category effects of marketing activities using aggregate store level scanner data for this we provide a framework derived from household utility maximizing behavior which assumes that a household chooses the bundle of products with the highest utility we use a second order taylor series approximation to an arbitrary utility function to represent bundle utility aggregate sales or shares in each category are derived under the assumption that households are heterogeneous in their preferences and in their sensitivities to marketing activities our estimation accounts for potential price endogeneity in demand using store level scanner data on four product categories liquid laundry detergents powdered laundry detergents liquid fabric softeners and sheet fabric softeners we find evidence for a complementary relationship between liquid softeners and both forms of detergents we also find that the magnitude of cross category elasticities are brand specific i e different brands in a category have a different price impact on the demand for a brand in another category the results have implications for retailers in terms of the potential need for cross category management as well as for manufacturers such as procter gamble that participate in all four categories we compare our model with a log log regression specification on three criteria estimated elasticities hold out sample predictions and retailer cross category pricing we find that the proposed model produces more reasonable estimates relative to the log log model it predicts better and is more useful for pricing purposes further in a simulation study we show that our proposed model can recover the elasticities from a data generating process that simulates household level joint outcomes across categories even after these data have been aggregated to brand level shares within each category by contrast the log log regression model is unable to do so

monetary policy and financial stability cross country evidence central banks may face challenges in achieving their price stability goals when financial stability risks are present there is however considerable heterogeneity among central banks with respect to how they manage these potential trade offs

discount rate heterogeneity and social security reform abstract as many countries consider the privatization of existing pay as you go social security systems the option to make participation in the new system voluntary may appeal to policy makers who need to obtain the political support of their workers a critical issue in evaluating such a reform and its economic consequences is the unobserved heterogeneity in households preferences for consumption this paper estimates the distribution of rates of time preference from the wealth data in the survey of consumer finances 1992 and a flexible life cycle model of consumption under income uncertainty the estimated distribution is then applied to a variety of reform proposals that incorporate a voluntary choice of how much to contribute to a dedicated retirement account and a rebate of the existing payroll tax that increases with the magnitude of the contribution the main finding is that an appropriate menu of reform plans can induce the voluntary buy out of 84 of existing payroll taxes at an immediate cost to national saving of less than 0 25 percentage point

on the role of technology shocks as a source of business cycles some new evidence i provide some new evidence that reinforces the conclusion in gal o 1999 that exogenous variations in technology play a very limited role if any as sources of the business cycle first i provide evidence that supports the identie cation of technology shocks proposed in that paper second i show that similar e ndings obtain when the same approach is implemented for the euro area using a newly available data set jel e32 e24

on the effectiveness of loan to value regulation in a multiconstraint framework models in the infinite horizon macro housing literature often assume that borrowers are constrained exclusively by the loan to value ltv ratio motivated by the swedish microdata i explore an alternative arrangement where borrowers are constrained by a collateral constraint and by a debt service to income ratio while stricter ltv limits are often considered as a measure to tackle the rise in household indebtedness i find that policy designed to lower the maximum permissible ltv ratio may actually leave the debt to gdp ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time

contracts and money why are contracts not fully indexed in a setting in which fully indexed contracts are feasible we find that when price level data are gathered with delay these contracts are not renegotiation proof the contracts that replace them entail a lower level of welfare for the parties to that contract they also imply that real variables respond to nominal shocks

bernanke versus taylor a post mortem our analysis sheds light on the issue of whether the monetary policy contributed to the recent housing boom and bust we have estimated and analysed a model that allows a comparison between the actual policy and several alternative taylor rules when the taylor rule path was computed using revised data and the deflator for the gdp we found a notable impact on key housing market variables supporting taylor s critique of the fed policy however the bulk of our evidence suggests that the policy as it would have been conducted under our real time taylor rules would not have had any significant impact on the housing market variables this conclusion is robust with regard to the price index used as well as the relative weights used on the inflation and output gaps

asymmetric reference price effects and dynamic pricing policies we consider a group of frequently purchased consumer brands which are partial substitutes and examine two situations the first where the group of brands is managed by a retailer and second where the brands compete in an oligopoly we assume that demand is a function of actual prices and reference prices and develop optimal dynamic pricing policies for each situation in addition to researchers studying pricing strategy our results may interest retailers choosing between hi lo pricing and an everyday low price and manufacturers assessing whether to follow procter gamble s lead and replace a policy of funding consumer price reductions through trade deals with a constant wholesale price a reference price is an anchoring level formed by customers based on the pricing environment the literature suggests that demand for a brand depends not only on the brand price but also whether the brand price is greater than the reference price a perceived loss or is less than it a perceived gain the responses to gains and losses are asymmetric broadly speaking we find that when enough consumers weigh gains more than losses the optimal pricing policy is cyclical likewise when they weigh losses more than gains a constant price is optimal thus we provide a rationale for dynamic pricing which is quite distinct from the three explanations previously offered 1 decreasing unit variable costs due to learning effects 2 the transfer of inventory to consumers who face lower inventory holding costs than do retailers and 3 competitive effects our explanations apply even when the other explanations do not i e in mature product categories where learning effects are minimal when retailer inventories are minimized through the use of just in time policies and when competitive effects do not exist as in a monopoly greenleaf 1995 has shown numerically that in the presence of reference price effects the optimal pricing policy for a monopolist can be cyclical we first analytically extend greenleaf s result to a monopolist with a constant cost of goods facing a homogeneous market where all customers either weigh gains more than losses or vice versa using this building block we examine a monopolist retailer managing multiple brands we assume that demand is a linear function of prices of multiple brands and together with an expression which reflects the reference price effect further we assume that the retailer maximizes average profit per period next we analyze a duopoly and extend the results to an oligopoly we assume that the manufacturers are able to set the retail prices as in an integrated channel here we retain the same demand function as for the retailer and derive markov perfect nash equilibria we use two alternative processes of reference price formation the exponential smoothed es past price process which is frequently used in the literature and for the multi brand situations the recently proposed reference brand rb process hardie johnson and fader 1993 in the latter the reference price is the current price of the last brand bought the reference brand we adapt the individual level rb formulation in hardie et al to an aggregate demand specification for the es process we obtain most results analytically for the rb process we use simulation finally we extend our results to a population with two customer segments segment 1 which weighs gains more than losses and segment 2 which does the opposite i e is loss averse when the market consists exclusively of segment 1 customers and es is the reference price process we find that prices are cyclical in all cases analyzed i e for a monopoly a monopolist retailer managing multiple brands a duopoly and an oligopoly if the rb formulation is the underlying process a monopolist retailer managing two brands uses cyclical prices but in a duopoly the equilibrium solution is for the brands to maintain constant prices when all customers belong to segment 2 i e they are loss averse constant prices are optimal in all cases for both reference price formulations when the population consists of both segment 1 and segment 2 and the es process applies we develop a sufficient condition for cyclical pricing policies to be optimal the condition is expressed in terms of the proportion of the two segment sizes the absolute difference between the gain and loss parameters of each segment and their respective exponential smoothing constants interestingly for reasonable values of the latter two factors cyclical policies are optimal even when the proportion of segment 1 is quite small similar magnitudes are obtained numerically for the rb case

consumption and capital market imperfections an international comparison the excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less low levels of consumer debt can result either from capital market imperfections or from a low demand for loans the evidence suggests that the former view is more appropriate than the latter and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints rather than to other factors copyright 1989 by american economic association

stock market wealth and consumption this paper explores the link between changes in the aggregate value of corporate stock and changes in consumer spending it presents data on the distribution of corporate stock ownership based on the 1998 survey of consumer finances it also uses time series evidence on the comovement of stock market wealth and various categories of consumer spending to calibrate the wealth effect it concludes that in the year after a change in stock market values consumer spending is likely to rise by between one and two cents for each dollar increase in the value of corporate stock