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

asymmetric monetary policy empirical evidence for italy a growing body of empirical work has examined the potential asymmetry in the effects of monetary policy on united states real activity this study looks for such an empirical evidence for italy in the period 1982 1998 monetary shocks are obtained as residuals from a central bank reaction function where the three months interbank rate is taken as the indicator of the monetary policy stance the effects of these positive and negative shocks on output are statistically different from zero and the null of symmetry between the two is rejected in favour of negative shocks having a greater impact on real output growth thus confirming an asymmetric effect of monetary policy even for italy

anticipated versus surprise inflation in household consumption behaviour abstract the purpose of this paper is to look at the question of whether it is the anticipated or surprise inflation or both that matter for household consumption and saving behaviour we use a large data sample from 23 countries covering mostly the period 1960 1979 evidence is overwhelming against the hypothesis that only the surprise part of inflation matters for household consumption and saving behaviour but is a bit mixed on the question of whether the anticipated and surprise parts of inflation affect with equal force which would justify the observed inflation as the appropriate inflation variable in household consumption and saving functions

how do banks respond to shocks a dynamic model of deposit taking institutions abstract this paper proposes a dynamic model of the optimal choices of a bank that benefits from market power and takes into account the impact of the deposit generation process interbank lending borrowing emerges as a buffer that assists the bank in smoothing intertemporal adjustments in interdependent loan and deposit choices the bank smooths the impact of interest rates shocks on its customers to minimize the adjustments over time of the stocks of deposits and loans it does not however provide insurance against negative shocks of real origin that increase its expected default costs the predictions of the model help to shed light on the available empirical evidence and to analyze some recent developments of the banking industry

the measurement of labor force dynamics with longitudinal data the labour market activity survey filter this article explores the measurement of labor force dynamics using longitudinal data focusing in particular on the canadian labour market activity survey lmas which represents a potential advance in longitudinal data collection because it measures aspects of dynamics not available in existing panel data such as the panel study of income dynamics and the national longitudinal survey we examine the implications of the lmas questionnaire structure the lmas filter for the study of labor market dynamics and undertake simulations to provide a quantitative assessment of the importance of this filter for labor force spells and transitions between labor force states

deposit market deregulation and interest rates the evolving deregulation of financial markets has sparked interest in the economic implications of increased flexibility in previously regulated markets much of the analysis has focused on deposit markets in which legislated maximum rates are being replaced by market determined equilibrium rates moreover because changes in deposit rates imply changes in the cost of funds to financial intermediaries concern has been voiced about the implications of deposit rate deregulation on the overall structure of interest rates specifically deregulation has been cited as one reason for the currently high rates of interest 2 in this paper we argue that this view of deregulation is flawed and we suggest that deregulation of deposit markets will lead to lower not higher loan and deposit rates furthermore we argue that previous analysis indicating that deposit deregulation leads to higher loan rates based on higher costs of funds to financial intermediaries depends on inadequate consideration of the role of implicit payments to depositors appropriate consideration of these implicit payments leads to results suggesting that deposit market deregulation should ceterus paribus lower loan rates the total cost of funds to banks falls as the interest rate ceiling is relaxed our theoretical results previewed here are admittedly at odds with some of the prior theoretical and empirical work on this issue our assumptions that the implicit deposit rate is flexible market determined and adjusts to clear the deposit market are crucial to our results

new directions for ui social welfare and vocational education and training i dedicate this address to ging wong ian midgley and craig riddell for bringing cerf the canadian employment research forum into existence and in so doing for producing quantum leaps forward in the policy relevance of labour economics research in this country in the development and use of important micro data bases for analysing labour market behaviour and in the use of labour economics research to inform public policy development

competition in banking and the lending channel evidence from bank level data in asia and latin america abstract this paper examines how banking competition affects the transmission of monetary policy through the bank lending channel we apply a two step estimation procedure using bank level panel data for commercial banks in 10 asian and 10 latin american countries during the period from 1996 to 2006 in the first step we measure the degree of banking competition by applying the methodology proposed by panzar and rosse 1987 in the second step we estimate a loan growth equation where the explanatory variables include the panzar rosse measure of banking competition the estimation results provide consistent evidence that increased competition in the banking sector weakens the transmission of monetary policy through the bank lending channel this is especially true for banks in latin american countries and banks of small size low liquidity and low capitalization we also discuss the policy implications of the main findings of this paper

monetary policy under alternative bank market structures abstract the purpose of this paper is to derive and compare the short run effects of monetary policy under both perfectly and imperfectly competitive banking markets within the context of a general equilibrium framework which emphasizes the demands for and supplies of financial assets it is demonstrated that the structure of banking markets can have a bearing on the appropriate choice of policy targets and instruments specifically the federal funds rate is shown to be a potentially ineffective target instrument for policy under a competitive banking system although it can be used to produce conventional short run effects when banking markets are imperfect in contrast the level of currency and unborrowed reserves can be utilized as an effective target instrument under either form of bank market structure

the asymmetric effects of monetary policy a nonlinear vector autoregression approach this paper tests for nonlinearity in a standard vector autoregression including output prices and money supply using an estimation strategy that is consistent with a wide range of structural macroeconomic models shocks to the money supply are found to have stronger output effects and weaker price effects when output growth is initially low positive and negative monetary shocks are found to have nearly symmetric effects in addition there is some evidence that shocks of different magnitudes have asymmetric effects these results are consistent with the view that the aggregate supply curve is convex

on the asymmetric effects of money supply shocks international evidence from a panel of oecd countries we examine whether the asymmetric effect of money on output is an international phenomenon and investigate the reasons for this asymmetry quarterly data from the 1963 93 period for a panel of twelve oecd countries strongly support asymmetry internationally negative money supply shocks are shown to have a stronger effect on output than positive shocks our methodology also enables us to distinguish between two sets of theories consistent with the output asymmetries a convex aggregate supply and a credit view we find that the effects of money on prices are generally symmetric which may be consistent with both sets of theories being operative at once

moving costs and housing demand abstract several recent housing demand studies use samples of recent movers based on the presumption that only such households are on their demand curves we find contrary to this presumption that the absolute values of the residuals from a standard housing demand equation fall with duration in the present dwelling this shows that the correlation pattern between housing and the explanatory variables at the moving date does not correspond to the average pattern over a typical housing spell we interpret this as evidence of forward looking behavior and show how it may be handled in econometric work with cross section samples

federal deposit insurance regulatory policy and optimal bank capital this paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the fdic essentially the fdic sells two products insurance and regulation to span the product space it must and does set two prices we argue that the need to establish regulatory disincentives to bank risk taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value i e the value of their right to continue in business stands at the center of these disincentives and in front of the fdic s insurance reserves just as a book shouldn t be judged by its cover a government agency shouldn t be judged by the words behind its initials with the fdic federal deposit insurance corporation the agency s name describes only part of its formal operations the fdic is quasi governmental has a regional structure and sells deposit insurance however the initials fail to convey the fdic s critical place in the governmental regulatory structure as the sole federal overseer of the approximately 8900 state chartered commercial banks that have chosen not to belong the federal reserve system reflecting the federal reserve s membership problem the number of these banks is growing year by year besides selling deposit insurance at bargain explicit rates the fdic performs four regulatory functions 1 entry regulation it passes on new banks applications for deposit insurance and on branch and merger proposals as well thereby protecting the value of existing bank charters 2 examination two thirds of fdic employees are concerned with inspecting bank records and supervising managerial activity 3 regulation of deposit rates and conditions for withdrawal by tradition fdic policies on these matters conform entirely with regulations applicable to federal reserve member banks and 4 disposition of failed banks when an insured bank fails the fdic usually chooses not to liquidate it 2

bank collapse and depression the recurrent banking panics of the 19th century and the great depression of the 1930s are widely viewed as failures of our economic system a simple version of samuelson s overlapping generations model is used to generate such failures of walrasian equilibrium the spontaneous panics generated involve a collapse of bank credit causing in turn a drop in investment demand the model suggests that both the recent technological advances in the intermediation industry and the current move towards deregulation of that industry are ominous developments

the asymmetric effects of demand shocks international evidence on determinants and implications the analysis focuses on the asymmetric effects of demand shocks the evidence across a sample of 19 industrial countries differentiates the effects of expansionary and contractionary aggregate demand shocks on real output growth and nominal wage and price inflation the difference appears consistent with a kinked supply curve that is dependent on the asymmetric flexibility of wages and or prices across countries furthermore the evidence does not support the endogeneity of asymmetric nominal flexibility with respect to demand variability or trend price inflation across countries on average across countries demand variability increases nominal wage and price inflation relative to deflation while exacerbating output contraction relative to expansion the apparent trade off between changes in real and nominal trends provides further support to the supply side explanation of asymmetry

the asymmetric effects of monetary shocks the case of turkey this paper examines whether there is an asymmetry in the effects of positive versus negative and small versus big money supply shocks and whether the effects of the shocks on output and prices vary over the business cycles in the case of turkey negative shocks to money are found to have greater output and smaller price effects compared to the effects of positive shocks irrespective of the initial state of the economy it is also found that monetary shocks of different size affect output growth and inflation rates proportionately these findings can be interpreted as evidence for the view that the short run aggragate supply curve is convex in such a country like turkey

asymmetric effects of money supply shocks and trend inflation in recent years a number of empirical studies have presented evidence that money supply shocks have asymmetric effects that is unexpected negative changes in the money supply slow the economy more than unexpected positive changes accelerate the economy evidence of asymmetry was documented by cover 1992 for the postwar u s economy and his finding was confirmed by de long and summers 1988 morgan 1993 rhee and rich 1995 and karras 1996a b stimulated by these empirical works several attempts have been made to provide microeconomic foundations for the asymmetric effects of money supply shocks 1 among those theories this paper examines the one that focuses on asymmetric price adjustment and let us call it a sticky price theory money supply shocks will have asymmetric effects on real output if prices are less flexible downward than upward this sticky price theory was proposed by tsiddon 1993 ball and mankiw 1994 and caballero and engel 1992 by employing a menu cost model the above researchers show that positive trend inflation can produce the asymmetric effects of money supply shocks the logic of their theory is the following along with price adjustment costs positive trend infla

the mis behaviour of the aggregate price level this paper investigates the response of the price level to random monetary shocks through a model of the fixed cost of changing a nominal price it shows that in an inflationary environment an expansionary monetary shock is accommodated faster than a contractionary monetary shock furthermore when the average rate of monetary expansion increases the lag in response to a positive shock decreases the study also proves that the relationship between the expected rate of inflation and the variance of real prices is positive only above a critical level of expected inflation the most striking result in this area appears in the work of caplin and spulber 1987 they show that in the aggregate when inflation is monotone stickiness disappears even when all firms follow a strict s s rule in their model since firms are uniformly distributed discontinuous price adjustment at the firm level does not create stickiness at the aggregate level caballero and engel 1992 extend this analysis to incorporate idiosyncratic shocks they show that in the presence of monotone idiosyncratic shocks the long run stationary distribution of prices is the uniform distribution but in the short run when the distribution of prices is arbitrary aggregate stickiness can result from firms discontinuous price adjustments in the present work the focus shifts i use a model where aggregate stickiness emerges naturally from firms discontinuous price setting to investigate the effects of the rate of inflation on aggregate stickiness this work shows that aggregate stickiness is negatively correlated with the rate of inflation the higher the rate of inflation the less sticky the response of the aggregate price level with respect to positive nominal shocks and the closer the economy approaches the caplin and spulber model therefore when modeling a dynamic inflation tax one must account not only for the decrease in the monetary base but also for the increase in the speed at which the aggregate price level 889

the keynesian recovery although modem macro economic analysis has almost immortalized keynes s is lm framework it has largely ignored the central message of the general theory this is attributable at least in part to keynes s failure to provide a clear concept of market organization as an alternative to the walrasian auction paradigm recent developments however in the theory of search and transaction externalities may ultimately provide that missing concept also work on indeterminacy in rational expectations models may direct the profession s attention away from wage stickiness and back towards the intertemporal co ordination problems that keynes saw as lying at the root of unemployment la reprise keynesienne meme si l analyse macroeconomique moderne a presque immortalis6 le cadre d analyse is lm de keynes elle a en gros ignore le message central contenu dans sa theorie generale cela est attribuable au moins en partie au fait que keynes n a pas propose une notion claire d organisation du marche qui puisse remplacer le paradigme de l encan a la walras cependant certains developpements recents dans la theorie des cofuts de la recherche d un emploi des cofuts de transaction et des effets extemes que ce phenomene entraine pourraient fournir un des ces jours le chainon manquant i1 se pourrait aussi que les travaux sur l indetermination dans les modeles d anticipations rationnelles puissent aider a faire que l attention des membres de la profession economiste cesse d etre braquee sur les problemes de rigidit6 des salaires pour se fixer de nouveau sur les problemes de coordination intertemporelle qui etaient pour keynes au coeur du probleme du chomage it is an honour to be giving the harold innis memorial lecture for 1986 i m especially happy to be giving it in 1986 because this is the fiftieth anniversary of keynes s general theory of employment interest and money and i d like to take this occasion to speak on the subject of the influence keynes s central the 1986 harold innis memorial lecture presented at the canadian economics association meetings in winnipeg 29 may 1986 robert clower david laidler michael parkin and douglas purvis provided useful comments on the original lecture canadian journal of economics revue canadienne d economique xix no 4 november novembre 1986 printed in canada imprime au canada 0008 4085 86 626 641 1 50 canadian economics association this content downloaded from 157 55 39 244 on fri 17 jun 2016 05 48 33 utc all use subject to http about jstor org terms the keynesian recovery 627 message in the general theory has had on contemporary macro economics and the influence it is likely to have in coming years if i had been asked to address this subject five or ten years ago i would have made the lecture very short although the keynesian is lm apparatus was still the main organizing device of all intermediate macro textbooks and of most policy oriented economists keynesian theoretical ideas had virtually disappeared from the leading journals having been displaced by unkeynesian ideas such as perfect wage flexibility perfect foresight the absence of involuntary unemployment the pareto optimality of business cycle fluctuations and so forth keynesian policy advice had become downright disreputable in some academic circles and was clearly on the defensive everywhere as for the status of keynesian ideas in society at large keynes once expressed the wish that some day economists could get themselves thought of as humble competent people on a level with dentists 1930 332 by 1979 keynesian economists had become thought of the way i used to think of my dentist when i was ten years old with a mouth full of cavities and he could see no reason for using novocaine not humble or competent but a menace to society who was all the more dangerous because of his belief that he knew better than others what was good for them and because he now had his hands on some of the crucial policy instruments since 1979 the public status of keynesian ideas has fallen even further the madmen in authority are now distilling their frenzy from other defunct economists but i see signs of some recovery in the status of those ideas within the discipline of economics signs that at least they aren t yet completely dead what i d like to argue is that there is an important aspect of keynes s central message that was never incorporated into the mainstream of macro economic theory that the failure to incorporate this aspect is largely responsible for the decline of keynesian theoretical ideas but that some recent theoretical developments offer hope that that failure may finally be rectified

measuring the stance of fiscal policy since the balance of public revenue and expenditure varies automatically with the state of capacity utilisation it has been argued for some time that the fiscal surplus or deficit should be cyclically corrected to produce a structural balance for assessing the stance of fiscal policy it is by no means implied by most practitioners that these cyclical fluctu ations have no effect on demand quite the contrary it is simply that the structural bal ance is seen as a more accurate measure of discretionary fiscal policy

inflation and the euler equation approach to consumption behaviour some empirical evidence abstract by using u s quarterly data on non durable consumption over the period 1951 i 1986 ii this note presents various pieces of evidence for the view that inflation variables in the anticipated surprise and uncertainty forms matter in the euler type consumption autoregression inflation variables are not only significantly negative and make the overall performance of the euler type specifications better but they also induce the wrong sign for the real rate of interest these results are puzzling and suggest that the question of why in contrast with a fisherian intertemporal optimization inflation matters in the consumption autoregression should be an important area for research

imperfect capital markets and the monetarist black box liquidity constraints inflation and the asymmetric effects of interest rate policy in this paper we examine the effects of unanticipated changes in interest rates on consumers expenditure in a model in which capital markets are imperfect we show that where constraints exist on the amounts individuals can borrow individuals may rationally choose to borrow up to the limits of such constraints over part of their lifetimes such liquidity constrained individuals in general have a higher marginal propensity to consume out of changes in current income than is the case with liquidity unconstrained individuals changes in interest rates which have the effect of redistributing income between liquidity constrained monetary debtors and liquidity unconstrained creditors will thus have a net effect on aggregate consumption we further show that this effect operates asymmetrically in the sense that an increase in interest rates will have a larger net impact than a fall formally we examine the impact of a change in the interest rate which we assume exogenous on the behaviour of an individual consumer the analysis is thus independent of the source of the interest rate shock 2 but we believe an important application of the model concerns the transmission mechanism through which monetary policy operates in this paper we do not consider the relationship between the supply of money and interest rates but simnply follow standard economic theory in assuming that monetary policy operates through the impact of interest rates on expenditure it is the mechanism linking interest rate changes to expenditure that has proved hard to identify and it is in this respect that our analysis may be relevant in suggesting a process through which interest rates can affect expenditure which appears to have been neglected hitherto the model provides a possible channel of transmission of monetary policy different from those usually considered 3 in so doing the model may offer some insight into the transmission processes within the monetarist black box and indeed suggests that the efficacy of monetary policy may in part depend on the existence of capital market imperfections

bank market structure and monetary control financial innovations and regulatory actions together have acted to produce sweeping changes in the u s financial environment much of the recent literature in the area of money and banking has been concerned with the implications of these developments for monetary policy however one major aspect of this issue which has been relatively ignored is the relationship between the competitive structure of banking markets and the capability of the federal reserve to exercise control over its intermediate or ultimate policy goals given that deregulation of banking and various forms of financial innovations e g technological innovations in the provision of financial services the proliferation of various near money financial assets and the growth of nonbank financial intermediaries have altered the competitive environment in banking it seems clear that this relationship should be investigated two previous efforts to examine the monetary policy implications of different bank market structures are aftalion and white 1977 and vanhoose 1983 in each of those papers the short run real sector effects of potential policy instruments under the structural extremes of perfect competition and monopoly are derived and contrasted however the analysis in each case is based upon models in which perfect certainty is assumed and no interactions are allowed between the real and

asymmetry in the effects of monetary and government spending shocks contrasting evidence and implications magda kandil 1 introduction recent research on business cycles has produced evidence that demonstrates the asymmetric effects of monetary shocks on economic variables 1 specifically the effect of expansionary monetary shocks on economic variables may be different from that of contractionary shocks the empirical evidence has stimulated efforts to provide an adequate theoretical explanation to the observed asymmetry sources of asymmetry have varied sharply in the theoretical literature primary explanations may be classified into supply side and demand side sources of asymmetry a strand of the theoretical literature has viewed asymmetry of economic fluctuations to be a supply side phenomenon demand shifts along a kinked supply curve are likely to produce varying effects on the economy as to the explanation of the kinked shape of the supply curve competing models offer explanations in one direction some have explained the asymmetric shape of the supply curve by conditions in the labor market this possibility arises in the context of models that advocate the contractual nominal wage rigidity explanation of business cycles the stipulation of wage contracts may allow for asymmetric wage indexation for example if wages are more responsive to expansionary demand shocks compared to contractionary shocks asymmetric wage indexation is consistent with a kinked supply curve in labor and output markets consequently expansionary demand shocks are likely to move the economy along a steeper supply curve 2 alternatively supply side asymmetry may be attributed to conditions in the p roduct market that differentiate price adjustment in the upward and downward directions faced with menu costs firms may be inclined for more frequent and larger adjustments of prices in the upward compared to the downward direction this possibility also is consistent with a steeper supply curve in the face of positive demand shocks compared to negative shocks 3 another line of the theoretical explanations of asymmetric economic fluctuations has emphasized possible asymmetry on the demand side of the economy conditions in the money and or goods markets may differentiate the response of aggregate demand to positive and negative shocks 4 this possibility differentiates the size of aggregate demand shifts in the face of expansionary and contractionary shocks in the absence of supply side asymmetry demand side asymmetry differentiates the severity of economic fluctuations in the face of positive and negative shocks the primary difference between demand side and supply side explanations concerns the output and inflationary effects in response to asymmetry supply side asymmetry produces a trade off between the asymmetric effects of demand shocks on output and their inflationary effects on wages and or prices the response of output growth is larger in the face of demand contraction compared to expansion concurrently the inflationary effect of demand shifts exceeds the deflationary effect on nominal wage and or price in contrast demand side asymmetry produces a positive correlation between the asymmetric effects of demand shocks on real output growth and nominal wage and price inflation that is larger output contraction relative to expansion correlates with smaller inflation relative to deflation of the nominal wage and price in the face of demand shocks the purpose of this investigation is to contrast asymmetry on the demand and supply sides in the face of two specific demand shocks monetary and government spending shocks demand and or supply conditions may differentiate the expansionary and contractionary effects of monetary and fiscal policies the article s analysis will highlight the specifics of this asymmetry the empirical evidence sheds some light on potential explanations of this asymmetry as follows conditions in the credit market and the behavior of ricardian consumers may differentiate the effects of expansionary and contractionary government spending shocks on aggregate demand

monetary policy in a model with a federal funds market fixed versus flexible deposit rates this paper examines the comparative static effects of various monetary policy instruments under the assumption of a market determined interest rate on demand deposits and alternatively for the case of an exogenously fixed demand deposit rate in both cases monetary policy effects are analyzed where the monetary policy operating target is either the federal funds rate or a reserve aggregate the aim of the paper is to assess the differences in monetary policy effects for each operating procedure between the flexible and fixed deposit rate cases we extend previous analyses of this subject by incorporating an explicit federal funds market in our model and providing a detailed analysis of monetary policy with a federal funds rate operating target with both a flexible and a fixed deposit rate additionally we consider the differences in the role of secondary monetary policy instruments such as the discount rate and the required reserve ratio in the different regimes finally the paper considers the implications of flexibility of the deposit rate for the feasibility of the current monetary policy strategy of using a short run operating target either the federal funds rate or a reserve aggregate to attain target

imperfect capital markets in empirical life cycle models abstract in the context of frisch demand functions that have prices and the marginal utility of income as independent variables we show how to incorporate imperfect capital markets into empirical models the analysis is for rational agents in an uncertain world

unorganized loan markets and monetary policy instruments abstract the paper uses a portfolio balance model to examine the relationship between monetary policy instruments and the unorganized loan rate predicting the direction of the change in this rate as a result of varying a policy instrument is important since this rate is one channel through which a change in a policy instrument transmits to real activity and since the demand side of the money market is partially re equilibrated through this change studies have not clearly emphasized the relationship between each of the policy instruments and this rate the findings depart in some cases from existing studies and shed more light on the relationships among policy instruments monetary aggregates and real activity