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

unemployment growth and taxation in industrial countries unemployeement and taxes do taxes affect the rate of umemployeement to the layman the upward trend in european unemployment is related to the slowdown of economic growth we argue that the layman s view is correct the increase in european unemployment and the slowdown in economic growth are related because they stem from a common cause an excessively rapid growth in the cost of labour in europe labour costs have gone up for many reasons but one is particularly easy to identify higher taxes on labour if wages are set by strong and decentralized trade unions an increase in labour taxes is shifted onto higher real wages this has two effects first it reduces labour demand and thus creates unemployment secondly as firms substitute capital for labour the marginal product of capital falls over long periods of time this in turn diminishes the incentive to invest and to grow the data strongly support this view according to our estimates the observed rise of 14 percentage points in labour tax rates between 1965 and 1995 in the eu could account for a rise in eu unemployment of roughly 4 percentage points a reduction of the investment share of output of about 3 percentage points and a growth slowdown of about 0 4 percentage points a year francesco daveri and guido tabellini

robust monetary rules under unstructured model uncertainty abstract this paper revisits a widely adopted approach to robust decision making developed by hansen and sargent 2003 hansen and sargent 2008 henceforth hs and applies it to monetary policy design in the face of model uncertainty we pay particular attention to two issues first we distinguish three possible forms of the implied game between malign nature and the policymaker in the hs procedure each leading to a different robust and approximating equilibria second we impose the zero lower bound zlb constraint on the nominal interest rate we show that the zlb constraint has serious consequences for a policymaker pursuing hs type robustness especially when accompanied by an inability to commit

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

deregulation shock in product market and unemployment in a dynamic general equilibrium model with endogenous markups and labor market frictions we investigate the effects of increased product market competition unlike most macroeconomic models of search we endogenize the labor supply along the extensive margin we find numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with fixed labor force for a calibration capturing alternatively the european and the us labor markets a deregulation episode which lowers the markup by 3 percentage points results in a fall in the unemployment rate by 0 17 and 0 05 percentage point respectively while the labor share is almost unaffected in the long run the sensitivity analysis reveals that product market deregulation is more effective in countries where product and labor market regulations are high unemployment benefits are small and labor force is more responsive

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

is the u s labor market really that exceptional a review of richard freeman america works is a splendid book and richard freeman is to be congratulated on producing a work that sets out what is right and what is wrong with the u s labor market while being a joy to read while i am generally sympathetic to both the analysis and the conclusions there are a number of points of disagreement that i highlight in this review in particular i would add to his policy recommendations by taking a gamble and enacting a law that entitled all employees in the united states to four weeks paid holiday per year in addition to public holidays this may transform summertime in the united states

when more flexibility yields more fragility the microfoundations of keynesian aggregate unemployment abstract wages are an element of cost crucially affecting the competitiveness of individual firms but the wage bill is also a crucial element of aggregate demand hence it could be that more flexible and fluid labour markets while allowing for faster inter firm reallocation of labour may also render the whole economic system more fragile more prone to recession and more volatile in this work we investigate some conditions under which such a conjecture applies the paper presents an agent based model that investigates the effects of two archetypes of capitalism in terms of regimes of labour governance defined by the mechanisms of wage determination firing labour protection and productivity gains sharing upon i labour market regularities and ii macroeconomic dynamics long term rates of growth gdp fluctuations unemployment rates inequality etc the model is built upon the keynes meets schumpeter family of models dosi et al 2010 explicitly incorporating different microfounded labour market regimes our results show that seemingly more rigid labour markets and labour relations are conducive to coordination successes leading to higher and smoother growth

learning and optimal monetary policy to conduct policy efficiently central banks must use available data to infer or learn the relevant structural relationships in the economy however because a central bank s policy affects economic outcomes the chosen policy may help or hinder its efforts to learn this paper examines whether real time learning allows a central bank to learn the economy s underlying structure and studies the impact that learning has on the performance of optimal policies under a variety of learning environments our main results are as follows first when monetary policy is formulated as an optimal discretionary targeting rule we find that the rational expectations equilibrium and the optimal policy are real time learnable this result is robust to a range of assumptions concerning private sector learning behavior second when policy is set with discretion learning can lead to outcomes that are better than if the model parameters are known finally if the private sector is learning then unannounced changes to the policy regime particularly changes to the inflation target can raise policy loss considerably

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

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

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

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

cross checking optimal monetary policy with information from the taylor rule abstract this paper shows that monetary policy should be delegated to a central bank that cross checks optimal policy with information from the taylor rule placing some weight on deviations from a taylor rule reduces the stabilization bias of discretionary monetary policy

new keynesian models and monetary policy a re examination of the stylized facts using an empirical new keynesian model with optimal discretionary monetary policy we estimate key parameters the central bank s preference parameters the degree of forwardlooking behavior in the determination of inflation and output and the variances of inflation and output shocks to match some broad characteristics of u s data the parameterization we obtain implies a small concern for output stability but a large preference for interest rate smoothing and a small degree of forward looking behavior in price setting but a large degree of forward looking in the determination of output our methodology also allows us to carefully examine the consequences of alternative parameterizations and to provide intuition for our results

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

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

imperfect credibility and robust monetary policy this paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model taking the smets wouters model as the central bank s approximating model the paper s main ndings are as follows first a central bank s credibility can have large consequences for how policy responds to shocks second central banks that have low credibility can bene t from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time consistent third even relatively small departures from perfect credibility can produce important declines in policy performance finally as a technical contribution the paper develops a numerical procedure to solve the decision problem facing an imperfectly credible policymaker that seeks robustness

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

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

differences in hours worked in the oecd institutions or fiscal policies we study the determinants of the level and the evolution of per capita hours worked in a panel of oecd countries since the 1970s following pesaran 2006 our empirical strategy allows for the possibility of cross sectionally correlated error terms due to unobserved common factors which are potentially nonstationary we find that much of the variation in per capita hours worked across countries and over time can be explained by differences in the level and structure of taxes and government expenditures differences in the evolution of labor and product market institutions have much less of a role to play our results show that a careful treatment of the time series properties of the data is crucial

crucial issues concerning central bank independence abstract this paper argues first that it is inappropriate to presume that central banks will in the absence of any tangible precommitment technology inevitably behave in a discretionary fashion that implies an inflationary bias furthermore there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it several implications are discussed

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

speed limit policies the output gap and optimal monetary policy in a standard new keynesian model a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal timeless perspective precommitment policy by stabilizing output gap changes the central bank imparts inertia into output and inflation that is absent under pure discretion even a fully optimizing i e non myopic central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting this abstract was borrowed from another version of this item

understanding the determinants of managerial ownership and the link between ownership and performance comment abstract himmelberg et al j financial econom 53 1999 353 384 argue that fixed effects estimators should be used in examination of the relationship between managerial ownership and firm performance i show that managerial ownership while substantially different across firms typically changes slowly from year to year within a company with rational managers maximising long term utility small one year changes in ownership are not likely to reflect notable changes in incentives that would lead to substantive within year changes in performance by relying on within variation fixed effects estimators may not detect an effect of ownership on performance even if one exists

monetary policy under uncertainty in an estimated model with labor market frictions abstract we study the design of monetary policy in an estimated model with sticky prices search and matching frictions and staggered nominal wage bargaining we find that the estimated natural rate of unemployment is consistent with the nber description of the u s business cycle and that the inflation unemployment trade off facing monetary policymakers is quantitatively important we also show that parameter uncertainty has a limited effect on the performance or design of monetary policy while natural rate uncertainty has more sizeable effects nevertheless policy rules that respond to the output or unemployment gaps are more efficient than rules responding to output or unemployment growth rates also in the presence of uncertainty about the natural rates

maintaining price stability how long is the medium term using a small estimated forward looking model of the euro area economy this paper analyses the determinants of the optimal monetary policy horizon for maintaining price stability first the optimal policy horizon for a price level objective is generally longer than that for an inflation objective second the policy horizon becomes longer the greater the weight on other objectives like minimising output gap and interest rate variability third the optimal policy horizon is shorter the higher the degree of forward lookingness in the economy and the greater the slope of the phillips curve finally even if society cares only about inflation stabilisation it often pays to give the central bank a price level objective provided the horizon is optimally chosen to be somewhat longer

patterns of work across the oecd market work per person of working age differs widely across the oecd countries and there have been some significant changes in the last forty years how to explain this pattern taxes are part of the story but much remains to be explained if we include all the elements of the social security systems like early retirement benefits sickness and disability benefits and unemployment benefits then we can capture some aspects of the overall pattern but still a lot remains unexplained the story favoured by alesina et al cepr dp 5140 2005 is that the nexus of strong unions generous welfare and social democracy implies both high taxes and pressure in favour of work sharing in response to adverse shocks this story however falls foul of the simple fact that most scandinavian countries now do much more work than the french and germans despite having stronger unions more generous welfare higher taxes and more social democracy ultimately we are forced into the position that there is no simple story some of the broad patterns can be explained but there remain country specific factors which are hard to identify but lead to substantial differences from one country to another

monetary policy rules for an open economy the most popular simple rule for the interest rate due to taylor 1993a is meant to inform monetary policy in economies that are closed on the other hand its main open economy alternative i e ball s 1999 rule based on a monetary conditions index mci may perform poorly in the face of specific types of exchange rate shocks and thus cannot offer guidance for the day to day conduct of monetary policy in this paper we specify and evaluate a comprehensive set of simple monetary policy rules that are suitable for small open economies in general and for the united kingdom in particular we do so by examining the performance of a battery of simple rules including the familiar taylor rule and mci based rules a la ball this entails comparing the asymptotic properties of a two sector open economy dynamic stochastic general equilibrium model calibrated on united kingdom data under different rules we find that an inflation forecast based rule ifb i e a rule that reacts to deviations of expected inflation from target is a good simple rule in this respect when the horizon is adequately chosen adding a separate response to the level of the real exchange rate contemporaneous and lagged appears to reduce the difference in adjustment between output gaps in the two sectors of the economy but the improvement is only marginal importantly an ifb rule with or without exchange rate adjustment appears robust to different shocks in contrast to naive or ball s mci based rules

output gaps and monetary policy in the emu area abstract several considerations suggest that the ecb may respond to emu wide output gaps in setting policy estimated reaction functions indicate that central banks respond to output gaps a taylor rule in which the central bank responds to inflation and the gap accounts for recent movements in interest rates in the emu area and optimal control exercises conducted in estimated econometric models suggest that reacting to the gap may be optimal even if the central bank cares solely about inflation in this paper we obtain point estimates with associated confidence bands of the emu wide output gap using uc models

constrained by hours and restricted in wages the quality of matches in the labor market this paper examines the explicit loss born by workers who face constraints in their working hours by analyzing differences in actual and desired hours and wages men tend to be underemployed while women are evenly split between over and underemployment losses in surplus are generally small but 10 of underemployed men and women experience losses of more than 34 or 50 of surplus respectively the loss measure is also an important determinant in predicting labor market transitions meaning increases in surplus losses generate a higher probability of changing from workers present jobs or changing the number of hours jel j22 j41

estimating central bank preferences under commitment and discretion this paper explains u s macroeconomic outcomes with an empirical new keynesian model in which monetary policy minimizes the central bank s loss function the presence of expectations in the model forms a well known distinction between two modes of optimization termed commitment and discretion the model is estimated separately under each policy using maximum likelihood over the volcker greenspan bernanke period comparisons of fit reveal that the data favor the specification with discretionary policy estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model

targeting inflation with a role for money this paper demonstrates how a target for money growth can be beneficial for an inflation targeting central bank acting under discretion because the growth rate of money is closely related to the change in the interest rate and the growth of real output delegating a money growth target to the central bank makes discretionary policy more inertial leading to better social outcomes this delegation scheme is also compared with other schemes suggested in the literature the results indicate that stabilizing money growth around a target can be a sensible strategy for monetary policy although other delegation schemes are often more efficient

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

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

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

little innovation many jobs an econometric analysis of the italian labour productivity crisis during the past twenty years italy has realized changes in labour legislation leading to a decentralization of wage bargaining and increased flexibility in labour relations both these factors have helped to curb wage growth and to enhance employment growth but have also led to a crisis in italian labour productivity growth our estimates among 3 000 firms show that firms with high shares of flexible workers a high labour turnover and lower costs of labour relative to capital experienced significantly lower rates of labour productivity growth our findings raise doubts about the mainstream call for flexibilisation of european labour markets we argue hat the italian shift towards a low productive and labour intensive growth path is problematic gainst the background of an ageing population

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

does the time consistency problem explain the behavior of inflation in the united states abstract this paper derives the restrictions imposed by barro and gordon s theory of time consistent monetary policy on a bivariate time series model for inflation and unemployment and tests those restrictions using quarterly us data from 1960 through 1997 the results show that the data are consistent with the implications of the theory for the long run behavior of the two variables indicating that the theory can explain the initial rise and subsequent fall of inflation over the past four decades the results also suggest that the theory must be extended to account more fully for the short run dynamics that appear in the data

inflation zone targeting abstract we study optimal monetary policy design in a simple model that deviates from the linear quadratic paradigm and provides a rationale for the practice of inflation zone targeting we show that the presence of either zone quadratic preferences or a zone linear relationship between inflation and economic activity provides strong incentives to deviate from conventional linear policies we calibrate the model based on parameters for the united states and the euro area and employ a numerical dynamic programming algorithm to derive the optimal policies with this algorithm we examine the role of uncertainty model structure and relative preference towards economic stability in determining the width of the implied targeted inflation zone

veblen effects political representation and the reduction in working time over the 20th century abstract we explain the substantial decline in work hours over the 20th century by the joint influence of the employees pecuniary emulation of the conspicuous consumption of top income earners and the balance of political power of employers and employees in the presence of conflicts of interest over the issue of working time we present a new labor discipline model incorporating veblen effects in which hours are determined by employers and subject to complete contracts but employee work effort is not we show that while veblen effects increase the hours sought by employees the hours selected by profit maximizing employers may exceed that preferred by employees who may then seek to reduce work hours by means of collective bargaining or governmental intervention we also identify conditions under which employees will prefer longer hours than offered by employers using newly available data on top income shares and on work hours from 10 major industrial economies and covering the entire past century we test two hypotheses that increases in the relative incomes of the very rich are associated with increased hours while increases in the political representation of workers have the opposite effect the estimated effects are large in economic magnitude highly significant and robust to alternative econometric specifications including country and time fixed effects using an alternative data set covering the last third of the past century we show that these results are robust to the inclusion of a measure of taxation and find that decentralized trade union bargaining but not centralized bargaining may raise working hours

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

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

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

quantifying and sustaining welfare gains from monetary commitment abstract our objectives are to quantify the stabilization welfare gains from commitment to examine how commitment to an optimal rule can be sustained as an equilibrium to find a simple interest rate rule that approximates the optimal commitment one we utilize an empirical micro founded euro area dsge model a quadratic approximation of household utility as the welfare criterion employing a nominal interest rate lower bound in contrast to previous studies we find significant commitment stabilization gains of around a 0 4 0 5 equivalent permanent consumption increase and with higher price stickiness gains over 2 we find that a simple optimized commitment rule responding to inflation and the real wage mimics the optimal one

poverty and worklessness in britain relative poverty in the uk has risen massively since 1979 mainly because of increasing worklessness rising earnings dispersion and benefits indexed to prices not wages the economic force underlying this is the significant shift in demand against the unskilled this has substantially weakened the low skill labour market which has increased both pay dispersion and worklessness particularly among low skilled men practical policies discussed include improving education and overall well being for children in the lower part of the ability range raising wage floors new deal policies tax credits and benefits for the workless

corporate behavior in adjusting to capital structure and dividend targets an econometric study this study of financing decisions by u s corporations examines the issuance of long term debt issuance of short term debt maintenance of corporate liquidity issuance of new equity and payment of dividends given costs and imperfections inherent in markets a firm s financial behavior is characterized as partial adjustment to long run financial targets individual firm data are used so that speeds of adjustment are allowed to vary by company and over time the results suggest that financial decisions are interdependent and that firm size interest rate conditions and stock price levels affect speeds of adjustment this study of financing decisions by u s corporations examines the issuance of long term debt short term debt and equity the maintenance of corporate liquidity and the payment of dividends the firm s financial behavior is characterized as partial adjustment to long run financial targets and individual firm data 1966 1978 are used to estimate firm specific time varying speeds of adjustment the results suggest that financial decisions are interdependent and that firm size interest rate conditions and stock price levels affect speeds of adjustment also the estimated coefficients are more plausible than the very small taggart 28 or very large spies 26 values found in earlier studies section i of the paper introduces the general model in section ii a tractable empirical model is developed section iii presents the data to be used in the study and discusses econometric issues in section iv results and conclusions are offered

how robustness can lower the cost of discretion model uncertainty has the potential to change importantly how monetary policy is conducted making it an issue that central banks cannot ignore using a standard new keynesian business cycle model this paper analyzes the behavior of a central bank that conducts policy under discretion while fearing that its model is misspecified the main results are as follows first policy performance can be improved if the discretionary central bank implements a robust policy this important result is obtained because the central bank s desire for robustness directs it to assertively stabilize inflation thereby mitigating the stabilization bias associated with discretionary policymaking second the central bank s fear of model misspecification leads it to forecast future outcomes under the belief that inflation in particular will be persistent and have large unconditional variance raising the probability of extreme outcomes private agents however anticipating the policy response make decisions under the belief that inflation will be more closely stabilized that is more tightly distributed than under rational expectations finally as a technical contribution the paper shows how to solve with robustness an important class of linear quadratic decision problems

the value of monetary policy commitment under imperfect fiscal credibility abstract a central finding of the previous monetary policy research is that commitment to a policy rule results in substantial welfare gains in this paper i reevaluate the value of monetary policy commitment in an environment where monetary and fiscal policies are conducted by separate branches of the government i find that welfare gains from monetary policy commitment can be small if the fiscal authority can exercise a certain degree of commitment on his own i also find that a moderate improvement in fiscal credibility can substantially reduce the welfare gains from full commitment in monetary policy under monetary leadership under fiscal leadership the degree of fiscal credibility does not affect the welfare gains from monetary commitment

greater wage inequality reduces average hours of work i argue that rising inequality in offered wages lowers average working hours if labour supply is concave in wages a decrease in the working hours of low paid workers is greater than an increase in working hours of high paid workers furthermore due to low market opportunities some low paid workers may leave the labour force using cps morg data for prime age men i find evidence in support of this explanation i establish empirically the concavity of the labour supply and find evidence that after controlling for the average wage wage inequality has a negative effect on labour supply

labor market institutions and wage inequality the authors investigate how labor market institutions such as unemployment insurance unions firing regulations and minimum wages have affected the evolution of wage inequality among male workers results of estimations using data on institutions in eleven oecd countries indicate that changes in labor market institutions can account for much of the change in wage inequality between 1973 and 1998 factors found to have been negatively associated with male wage inequality are union density the strictness of employment protection law unemployment benefit duration unemployment benefit generosity and the size of the minimum wage over the 26 year period institutional changes were associated with a 23 reduction in male wage inequality in france where minimum wages increased and employment protection became stricter but with an increase of up to 11 in the united states and united kingdom where unions became less powerful and in the united states minimum wages fell

targeting nominal income growth or inflation within a simple new keynesian model emphasizing forward looking behavior of private agents i evaluate optimal nominal income growth targeting versus optimal inflation targeting when the economy is mainly subject to shocks that do not involve monetary policy trade offs for society inflation targeting is preferable otherwise nominal income growth targeting may be superior because it induces inertial policy making which improves the inflation output gap trade off somewhat paradoxically inflation targeting may be relatively less favorable the more society dislikes inflation and the more persistent are the effects of inflation generating shocks jel e42 e52 f58

central bank reputation in a forward looking model this paper examines whether reputation concerns can induce the central bank to implement the time inconsistent optimal monetary policy in the standard new keynesian model interestingly the forward looking nature of this model enables us to account for the coordination of the private agents on the punishment length of their trigger strategy our results suggest that both the inflation bias and the stabilization bias can be overcome by a reputation concerned central bank for the calibrations used in the literature these results enable us to endogenize woodford s timeless perspective and tend to weaken the case for recent monetary policy delegation proposals

deviations from optimal ceo ownership and firm value abstract the transaction cost theory of managerial ownership and firm value predicts that deviations from optimal managerial ownership reduce firm value this paper empirically tests the transaction cost theory by studying the relation between deviations on either side of optimal ceo ownership and firm value we find that both above optimal and below optimal deviations reduce firm value we find that a change in ceo ownership is associated with a higher lower abnormal return if it moves the ownership towards away from the optimal level these findings are consistent with the transaction cost theory of managerial ownership and firm value

on inflation and output with costly price changes a simple unifying result this paper determines the real effects of credible disinflation when price setting is staggered the results are surprising a fairly quick disinflation causes a boom this finding suggests that nominal price rigidity alone does not explain why disinflation is costly in actual economies this abstract was borrowed from another version of this item

uncertain potential output implications for monetary policy abstract a small forward looking model of the euro area economy is used to investigate the implications of incomplete information about potential output for the conduct of monetary policy three results emerge first under optimal monetary policy output gap uncertainty leads to persistent deviations between the actual and the perceived output gap in response to supply and cost push shocks second in first difference form a simple policy rule such as the taylor rule continues to perform relatively well as long as the output gap is optimally estimated third incomplete information implies that it is optimal to appoint a more hawkish central bank

dynamic inconsistencies counterfactual implications of a class of rational expectations models a number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations while the theoretical motivation behind these models is sound the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data for both inflation and real side variables exhibit gradual and hump shaped responses to real and monetary shocks for models that are intended for monetary policy analysis these dynamic shortcomings should be considered quite serious when monetary policy has only short run effects on real variables the inability to approximately capture the short run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis this paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem the paper also discusses several potential solutions to the problem including alterations to the expectations assumption to the order of differencing implicit in the model and to the underlying behavioral assumptions this abstract was borrowed from another version of this item

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

emulation inequality and work hours was thorsten veblen right we investigate the manner in which a desire to emulate the rich influences individuals allocation of time between labour and leisure greater inequality inducing longer work hours as a result data on work hours in ten countries over the period 1963 98 show that greater inequality is indeed associated longer work hours these veblen effects are large and the estimates are robust using country fixed effects and other specifications because consumption inequality is a public bad a social welfare optimum cannot be implemented by a flat tax on consumption but may be accomplished by more complicated progressive consumption taxes at the close of the nineteenth century thorsten veblen proposed what he termed pecuniary emulation as the foundation of a theory of consumption spending he maintained is driven by relative status considerations that is by the desire to be a particular type of person as much as bythedesire to enjoytheconsumer goodsper se the joneses with whom one had to keep up were not the neighbours but the rich theirleveloflivingbecamethenever attainableobjectiveinaconsumptionarmsrace among the less well to do in the theory of the leisure class he wrote the motive is emulation the stimulus of an invidious comparison especially in any community in which class distinctions are quite vague all canons and reputability and decency and all standards of consumption are traced back by insensible gradations to the usages and thoughts of the highest social and pecuniary class the wealthy leisure class 1934 p 81 while valued by some economists as capturing common sense aspects of consumption as a form of status seeking veblen s view of social preferences was soon eclipsed by the simpler and more tractable neoclassical theory of the consumer relegated to the underworld of economics veblen s ideas have nonetheless resonated over the ensuing years in the writing of duesenberry 1949 leibenstein 1950 and galbraith 1958 at the middle of the past century and schor 1998