learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

the policy preferences of the us federal reserve in this paper we model and explain us macroeconomic outcomes subject to the discipline that monetary policy is set optimally exploiting the restrictions that come from optimal policymaking we estimate the parameters in the federal reserve s policy objective function together with the parameters in its optimization constraints for the period following volcker s appointment as chairman we estimate the implicit inflation target to be around 1 4 and show that policymakers assigned a significant weight to interest rate smoothing we show that the estimated optimal policy provides a good description of us data for the 1980s and 1990s

investment and interest rate policy abstract the paper s theorems reverse two standard results of new keynesian economics simply by appending endogenous investment to a benchmark imperfect competition sticky price model our results are a a passive interest rate rule where the monetary authority responds to inflation by lowering the real interest rate implies local equilibrium uniqueness whereas an active rule does not generate a locally unique equilibrium b a temporary exogenous increase in the nominal interest rate causes a temporary increase in output and investment extensions of the benchmark model including generalized preferences and alternative interest rate rules are also examined journal of economic literature classification numbers e12 e31 e52

the demand for money in developing countries assessing the role of financial innovation traditional specifications of money demand have commonly been plagued by persistent overprediction implausible parameter estimates and highly autocorrelated errors the authors argue that some of these problems stem from the failure to account for the impact of financial innovation they estimate money demand for ten developing countries using various proxies for financial innovations they also assess the relative importance of this variable finding financial innovation can be better modeled as a stochastic random walk trend rather than a deterministic time trend financial innovation plays an important role in determining fluctuations of the demand for money the importance of this role increases with the rate of inflation

ppp exchange rate rules macroeconomic in stability and learning in order to maintain competitiveness governments in developing economies seem to have pursued purchasing power parity ppp exchange rate rules by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target this article shows that these rules are likely to induce macroeconomic instability as they generate sunspot driven fluctuations that are in fact learnable by agents in the expectational stability sense it finds that the existence of these learnable sunspots depends among others on open economy features including the degree of openness and the degree of exchange rate pass through to consumer s import prices

determinacy and learnability of monetary policy rules in small open economies this paper evaluates under which conditions different taylor type rules lead to determinacy and expectational stability e stability of rational expectations equilibrium in a simple new keynesian small open economy model developed by gali and monacelli 2005 in particular we extend the bullard and mitra 2002 results of determinacy and e stability in a closed economy to this small open economy framework our results highlight an important link between the taylor principle and both determinacy and learnability of equilibrium in small open economies more importantly the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways a key finding is that contrary to bullard and mitra expectations based rules that involve the cpi and or the nominal exchange rate limit the region of e stability and the taylor principle does not guarantee e stability we also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability yet these rules might not be desirable since they promote greater volatility in the economy

dynamic predictor selection in a new keynesian model with heterogeneous expectations abstract this paper introduces dynamic predictor selection into a new keynesian model with heterogeneous expectations and examines its implications for monetary policy we extend branch and mcgough 2009 by incorporating endogenous time varying predictor proportions along the lines of brock and hommes 1997 we find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution the qualitative nature of the non linear dynamics turns on the interaction between hawkishness of the government s policy and the extrapolative behavior of non rational agents

optimal constrained interest rate rules we show that if policymakers compute the optimal unconstrained interest rate rule within a taylor type class they may be led to rules that generate indeterminacy and or instability under learning this problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration we advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations and that minimize the expected loss computed using structural parameter priors subject to this constraint

the taylor principle fights back part ii abstract the existing literature holds that the taylor principle often leads to indeterminacy in new keynesian models that allow for capital accumulation and limited asset market participation this conclusion is special however to the case of continuous full employment when the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously determinacy is the norm the threat of indeterminacy is limited to a tiny irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast everywhere else the taylor principle guarantees a unique rational expectations equilibrium the dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market

using a long term interest rate as the monetary policy instrument abstract using a short term interest rate as the monetary policy instrument can be problematic near its zero bound constraint an alternative strategy is to use a long term interest rate as the policy instrument we find when taylor type policy rules are used by the central bank to set the long rate in a standard new keynesian model indeterminacy that is multiple rational expectations equilibria may often result however a policy rule with a long rate policy instrument that responds in a forward looking fashion to inflation expectations can avoid the problem of indeterminacy

performance of monetary policy with internal central bank forecasting abstract recent models of monetary policy have analyzed the desirability of different optimal and ad hoc interest rules under the restrictive assumption that forecasts of the private sector and the central bank are homogeneous this paper studies the implications of heterogeneity in forecasting by the central bank and private agents for the performance of interest rules in a framework of econometric learning

sports jobs and taxes the economic impact of sports teams and stadiums this book examines the economic impact of new stadiums or a sports franchise on the local economy it explores such general issues as the appropriate method for measuring economic benefits and costs the source of the bargaining power of teams in obtaining subsidies from local government the local politics of attracting and retaining teams the relationship between sports and local employment and the importance of stadium design in influencing the economic effects of a facility the book also contains case studies of major league sports facilities in baltimore chicago cincinnati cleveland indianapolis san francisco and the twin cities and of minor league baseball stadiums and spring training facilities the primary conclusions are the sports teams and stadiums are not a source of local economic growth and employment the size of the net subsidy exceeds the financial benefit of a new stadium and cities are probably willing to subsidize sports teams because of the intense popularity of sports among a substantial proportion of voters and businesses and the leverage that teams enjoy from the monopoly position of professional sports leagues

stabilization policy and the costs of dollarization this paper compares the welfare costs of business cycles in a dollarized economy to those associated with several alternative monetary regimes belonging to three broad families interest rate feedback rules inflation targeting and money growth rate rules the analysis is conducted within an optimizing model of a small open economy with sticky prices the model is calibrated to the mexican economy and is driven by 3external shocks terms of trade world interest rate and import price inflation we show econometrically that these shocks explain more than 75 of the observed forecasting error variance of mexican output and the mexican real exchange rate at 4 to 16 quarter horizons the welfare comparisons suggest that dollarization is the least successful of the monetary policy rules considered agents are willing to give up more than 2 of their non stochastic steady state consumption to see a policy other than dollarization implemented

stable near rational sunspot equilibria abstract we introduce a new class of solutions to nonlinear forward looking models called near rational sunspot equilibria nrse nrse are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy and are near rational in that agents use the optimal linear forecasting model when forming expectations generic results for existence and stability under learning are established nrse in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model s minimal state variable solution is e stable nrse are readily computable and our results make it possible to use the standard linear tools to search for stable nrse we illustrate our results using a canonical nonlinear new keynesian model

exchange rate rules and macroeconomic stability this paper discusses exchange rate rules in their role as macroeconomic instruments we abstract throughout from the trend part of exchange rate behaviour a crawling peg necessitated by differences in trend inflation and emphasise instead the implications of exchange rate rules in providing flexibility of real wages or in affecting the stability of output or prices

timing and real indeterminacy in monetary models an increasingly common approach to the theoretical analysis of monetary policy is to ensure that a proposed policy does not introduce real indeterminacy and thus sunspot fluctuations into the model economy policy is typically conducted in terms of directives for the nominal interest rate this paper uses a discrete time money in the utility function model to demonstrate how seemingly minor modifications in the trading environment result in dramatic differences in the policy restrictions needed to ensure real determinacy these differences arise because of the differing pricing equations for the nominal interest rate

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

how does a new sports stadium affect housing values the case of fedex field this study investigates how the construction of a sports stadium affects residential housing values hedonic analyses are conducted to assess the price differentials between housing units in close proximity to fedex field home of the washington redskins and comparable units away from it using a difference in difference approach the study finds that properties near fedex field sold at a discount however this price differential was narrowed after the completion of the stadium contrary to neighborhood activists concern that sports venues adversely affect property values the findings of this study indicate that a new stadium improves housing values in the surrounding area

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

the price of victory the impact of the olympic games on residential real estate markets the olympic games have come to be viewed as an unprecedented opportunity to leverage a short term event into a long term positive legacy although the olympics are assumed to yield economic benefits there has been no rigorous analysis of the impact of hosting on residential real estate markets utilising a substantial dataset for six host cities and comparable cities between 1984 and 2000 this paper employs an adjusted interrupted time series approach to estimate the house price impacts of hosting the olympic games the results suggest that the olympics are not a one size fits all economic development strategy and that potential outcomes are dependent on a number of factors including the co ordination of planning and olympic related development and the relative scale of the total olympic investment

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

compensating differentials and the social benefits of the nfl abstract we use hedonic rent and wage equations to measure compensating differentials in central cities and metropolitan areas with franchises of the national football league rents are about 8 percent higher in the central cities but this impact may not carry over to broader geographical areas wages are about 2 percent lower in areas with teams but the standard error on this parameter is large the central city results indicate that sports franchises appear to be a public good once these quality of life benefits are included in the calculus the large public expenditure on new stadiums appears to be a good investment for cities and their residents

monetary policy inertia more a fiction than a fact abstract empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia this evidence is very hard of reconcile with the alternative evidence of low predictability of monetary policy rates in this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by taylor 1993 discretion versus policy rules in practice canergie rochester conference series on public policy 39 195 214 after appropriately diagnosing and taking care of the weak instruments problem we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules

investment interest rate policy and equilibrium stability abstract carlstrom and fuerst 2005 investment and interest rate policy a discrete time analysis journal of economic theory 123 4 20 show that in the presence of investment activity and price stickiness indeterminacy of equilibrium is induced by forward looking monetary policy that sets the interest rate in response only to future inflation in a stochastic version of their model we find that this indeterminacy problem is due to a cost channel of monetary policy whereby inflation expectations become self fulfilling and the problem can be overcome once the forward looking policy responds also to current output or contains sufficiently strong interest rate smoothing since this prevents the self fulfilling expectations we also show that when e stability is adopted as the selection criterion from multiple equilibria even the forward looking policy generates a locally unique non explosive e stable fundamental rational expectations equilibrium as long as the policy response to expected future inflation is sufficiently strong

the optimum quantity of money rule in the theory of public finance this paper examines optimal tax policy in a monetary economy in which money serves as an intermediate good that helps facilitate the conversion of scarce resources into tinal consumption goods by enabling consumers to economize on the costs of transacting it is shown that in such an environment even though distorting taxes must be levied for revenue purposes the optimal tax structure calls for abstaining from inflationary finance and adopting the optimum quantity of money rule

monetary policy stock prices and consumption externalities abstract we study interest rate rules responding to stock prices in a sticky price sticky wage new keynesian framework subject to consumption externalities for given wage rigidity such rules are beneficial to equilibrium determinacy if households preferences feature sufficiently strong keeping up with the joneses externalities

worldwide macroeconomic stability and monetary policy rules we study the interaction of multiple large economies in dynamic stochastic general equilibrium each economy has a monetary policymaker that attempts to control the economy through the use of a linear nominal interest rate feedback rule we show how the determinacy of worldwide equilibrium depends on the joint behavior of policymakers worldwide we also show how indeterminacy exposes all economies to endogenous volatility even ones where monetary policy may be judged appropriate from a closed economy perspective we construct and discuss two quantitative cases in the 1970s worldwide equilibrium was characterized by a two dimensional indeterminacy despite u s adherence to a version of the taylor principle in the last 15 years worldwide equilibrium was still characterized by a one dimensional indeterminacy leaving all economies exposed to endogenous volatility our analysis provides a rationale for a type of international policy coordination and the gains to coordination in the sense of avoiding indeterminacy may be large

learning monetary policy and asset prices this working paper should not be reported as representing the view s of the imf the views expressed in this working paper are those of the author s and do not necessarily represent those of the imf or imf policy working papers describe research in progress by the author s and are published to elicit comments and to further debate

some implications of learning for price stability abstract survey data on expectations of a range of macroeconomic variables exhibit low frequency drift in a new keynesian model consistent with these empirical properties optimal policy in general delivers a positive inflation rate in the long run two special cases deliver classic outcomes under rational expectations as the degree of low frequency variation in beliefs goes to zero the long run inflation rate coincides with the inflation bias under optimal discretion for non zero low frequency drift in beliefs as households become highly patient valuing utility in any period equally the optimal long run inflation rate coincides with optimal commitment price stability is optimal the optimal state contingent response to cost push disturbances similarly reflects properties of optimal discretion and optimal commitment depending on the degree of low frequency variation in beliefs when beliefs exhibit substantial variation in response to short run forecast errors optimal policy is closer to commitment

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

inflation determination with taylor rules is new keynesian analysis critically flawed abstract cochrane 2007 has strongly questioned the basic economic logic of current monetary policy analysis arguing that new keynesian nk models imply rational expectations paths with explosive inflation that do not imply explosions in real variables relevant for transversality conditions consequently the usual logic does not rule out solutions with explosive inflation that result does not however justify negative conclusions about nk analysis for a different criterion is logically satisfactory it is that to be plausible a re solution must satisfy the property of least squares learnability adoption of this criterion serves to justify in principle the bulk of current mainstream analysis

monetary policy determinacy and learnability in a two block world economy we study how determinacy and learnability of worldwide rational expectations equilibrium may be affected by monetary policy in a simple two country new keynesian framework under both fixed and flexible exchange rates we find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation

determinacy learnability and monetary policy inertia we show how monetary policy inertia can help alleviate problems of indeterminacy and non existence of stationary equilibrium observed for some commonly studied monetary policy rules we also find that inertia promotes learnability of equilibrium the context is a simple forward looking model of the macroeconomy widely used in the rapidly expanding literature in this area we conclude that this might be an important reason why central banks in the industrialized economies display considerable inertia when adjusting monetary policy in response to changing economic conditions

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

learning in a misspecified multivariate self referential linear stochastic model this paper introduces a general method to study stability under learning of equilibria resulting from agents with misspeci ed perceptions of the law of motion of the economy this is done by transforming the actual and perceived laws of motion into the form of seemingly unrelated regressions and then linearly projecting the actual law of motion into the same class as the perceived law of motion i study the new keynesian is lm model with inertia under all possible classes of restricted perceptions it turns out that the results found in bullard and mitra 2002 2003 are robust under misspeci ed expectations

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

learning and price volatility in duopoly models of resource depletion the aim of this paper is to provide a theoretical model that can account for price fluctuations in depletable resource markets we do so by introducing learning into a hotelling style duopoly model of optimal resource depletion before the depletable resource becomes scarce the self confirming equilibrium of the model mirrors noncooperative rational expectations equilibrium in that supply is high and price is low although learning does induce occasional upward price spikes that are followed by a long period of falling price once the depletable resource becomes scarce the dynamics of the market change significantly with the self confirming equilibrium mirroring the cooperative rather than noncooperative rational expectations equilibrium supply is low and price is high price spikes still occur but against a background of increasing prices when scarcity is sufficient then the market is permanently in a self confirming equilibrium that is equivalent to cooperative rational expectations equilibrium

adaptive learning forecast based instrument rules and monetary policy abstract this paper argues that recently popular forecast based instrument rules for monetary policy may fail to stabilize economic fluctuations in a new keynesian model of output gap and inflation determination in which private agents face multi period decision problems but have non rational expectations and learn over time if the monetary authority adopts a forecast based instrument rule and responds to observed private forecasts then this class of policies frequently induce divergent learning dynamics a central bank that correctly understands private behavior can mitigate such instability by responding to the determinants of private forecasts this suggests gathering information on the determinants of expectations to be useful

monetary policy judgment and near rational exuberance we study how the use of judgement or add factors in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods we examine the possibility of a new phenomenon which we call exuberance equilibria i n the new keynesian monetary policy framework inclusion of judgement in forecasts can lead to self fulfilling fluctuations in a subset of the determinacy region we study how policymakers can minimize the risk of exuberance

on the robustness of bubbles in linear re models the authors analyze the expectational stability e stability of the different solutions of a linear rational expectations model in which the endogenous variable depends on expectations of its current and future values formed in the past and also on its own lagged value it is shown that continuum of bubble solutions cannot be strongly e stable in contrast for certain parameter values a particular solution that would normally be identified as a bubble solution can be strongly e stable the results are applied to a macroeconomic model with real balance effects copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

does the reserve bank of australia follow a forward looking nonlinear monetary policy rule abstractthe conventional monetary policy rule describes a simple linear relationship between the domestic interest rate inflation rate and output gap an important extension to this rule is to inc

a new keynesian model with heterogeneous expectations abstract within a new keynesian model we incorporate bounded rationality at the individual agent level and we determine restrictions on expectations operators sufficient to imply aggregate is and as relations of the same functional form as those under rationality this result provides dual implications the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers imposing heterogeneous expectations at an aggregate level may be ill advised on the other hand accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity as an example we consider a case where a fraction of agents are rational and the remainder are adaptive and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity

another weakness of determinacy as a selection criterion for rational expectations models abstract this paper argues against determinacy as a guide to interpret rational expectations solutions using an example in which a determinate solution exists but differs sharply in dynamic behavior from that implied by the model considered on a sector by sector basis

do real balance effects invalidate the taylor principle in closed and open economies this paper examines the determinacy implications of forecast based monetary policy rules that set the interest rate in response to expected future inflation in a neo wicksellian model that incorporates real balance effects we show that the presence of such effects in closed economies restricts the ability of the taylor principle to prevent indeterminacy of the rational expectations equilibrium the problem is exacerbated in open economies particularly if the policy rule reacts to consumer price rather than domestic price inflation however determinacy can be restored in both closed and open economies with the addition of monetary policy inertia

a new keynesian model with staggered price and wage setting under learning abstract this paper provides a study of the implications for economic dynamics when the central bank sets its nominal interest rate target in response to variations in wage inflation i provide results on the existence uniqueness and stability under learning of rational expectations equilibrium for alternative specifications of the manner in which monetary policy responds to economic shocks when nominal rigidities are present monopolistically competitive producers set prices via staggered price contracts and households set nominal wages in the same fashion in this setting the conditions for determinacy and learnability of rational expectations equilibrium differ from a model where only prices are sticky i find that when the central bank responds to wage and price inflation and to the output gap a taylor principle for wage and price inflation arises that is related to stability under learning dynamics in other words a moderate reaction of the interest rate to wage inflation helps to avoid instability under learning and indeterminacy

monetary policy and stable indeterminacy with inertia abstract we examine existence and stability under learning of sunspot equilibria in a new keynesian model incorporating inertia indeterminacy remains prevalent stable sunspots abound and inertia in is and aggregate supply as relations do not significantly impact the policy region containing stable sunspots

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

an estimated canadian dsge model with nominal and real rigidities this paper develops a dynamic stochastic general equilibrium dgse model for the canadian economy and evaluates the real effects of monetary policy shocks to generate high and persistent real effects the model combines nominal frictions in the form of costly price adjustment with real rigidities modelled as convex costs of adjusting capital and employment

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

monetary policy indeterminacy and learning abstract forward looking monetary models with taylor type interest rate rules are known to generate indeterminacies with a potential dependence on extraneous sunspots for some structural and policy parameters we investigate the stability of these solutions under adaptive learning focusing on common factor or resonance frequency representations in which the observed sunspot has a suitable time series structure we consider specifications incorporating both lagged and expected inflation in the phillips curve and both expected and inertial elements in the policy rule we find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises

financial factors and monetary policy determinacy and learnability of equilibrium abstract we contribute to the debate on whether central banks should respond to financial factors in monetary policy rules by evaluating equilibrium determinacy and e stability in the presence of a financial accelerator policies responding to lagged asset prices either reduce the region of determinacy or e stability in the parameter space however a response to current asset prices expands both regions of determinacy and e stability policy rules reacting to credit volume constrict the determinacy region most policies responding to credit spreads expand determinacy and e stability regions we favor the inclusion of current asset prices or credit spreads in monetary policy rules

the lucas critique policy invariance and multiple equilibria the lucas critique of econometric policy evaluation argues that the parameters of econometric models are subject to theoretical cross equation restrictions which follow from the fact that the endogenous variables of the models are chosen optimally by forward looking agents in this paper i argue that these facts alone are insufficient to generate such restrictions i present an example of a model in which there exist multiple stationary rational expectations equilibria one of which is supported by a process invariant forecast rule immunity to the lucas critique is proposed as a selection criterion in models with multiple equilibria

targeting the real exchange rate theory and evidence abstract this paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate an intertemporal optimizing model suggests that in the absence of changes in fiscal policy a more depreciated level of the real exchange rate can only be attained temporarily this can be achieved by means of higher inflation and or higher real interest rates depending on the degree of capital mobility evidence for brazil chile and colombia supports the model s prediction that undervalued real exchange rates are associated with higher inflation

learning and the central bank abstract it is well known that sunspot equilibria may arise under an interest rate operating procedure in which the central bank varies the nominal rate with movements in future inflation a forward looking taylor rule this paper demonstrates that these sunspot equilibria may be learnable in the sense of e stability

estimation and control of an optimization based model with sticky prices and wages abstract this paper provides estimates of an optimization based equilibrium model with sticky prices and wages the estimated model is used to analyse the welfare properties of various interest rate rules for conducting monetary policy an important feature of this model is that it involves a tradeoff between the variances of price and wage inflation and the output gap this tradeoff implies that it is desirable for the monetary authority to respond to wage inflation in addition to price inflation output and past interest rates when setting the current interest rate the issue whether wages and prices can be indexed to steady state inflation has important implications both for the characterization of optimal interest rate rules and interest rate volatility in particular optimal policy in the presence of indexation induces implausibly high steady state inflation

temporary projects durable outcomes urban development through failed olympic bids however it may be defined urban development typically implies the production of durable legacies yet these legacies are often planned through contingent temporary projects the role of temporary projects in implementing urban development is often interpreted in linear fashion projects are viewed as isolated events which incrementally work toward already existing development agendas i argue instead that temporary projects play a recursive role in development planning interpreted as a series of interlinked projects they not only support but also redefine agendas for durable development i focus on one type of temporary project failed bids to host the olympics which i assess through a comparative 20 year sample of bids and through case studies of failed bids in doha qatar and new york usa i show that event led development planning leverages project contingency and policy failure to construct long term development agendas as cities bid multiple times and recycle plans across projects the p

output persistence from monetary shocks with staggered prices or wages under a taylor rule we analytically examine output persistence from monetary shocks in a dsge model with staggered prices or wages under a taylor rule surprisingly while taylor style staggering never yields persistence calvo style staggering of wages does generate persistence under decreasing returns to labour c 2009 elsevier b v all rights reserved

currency substitution risk premia and the taylor principle abstract this paper studies the equilibrium determinacy properties of a simple interest rate rule in a small open economy subject to currency substitution i e the use of a foreign currency for domestic transactions and risk premia on foreign borrowing it shows that if currencies are substitute in the provision of liquidity services the rule s response to inflation has to be sufficiently above unity for the equilibrium to be locally determinate this reinforced taylor principle requirement appears to be more binding in economies characterized by a larger elasticity of currency substitution more debt elastic country risk premia and intermediate degrees of dollarization in transactions

monetary policy rules in a new keynesian euro area model the first part of this paper is devoted to describe a new keynesian model which after calibration shows a great fit on euro area macroeconomic data then the stabilizing properties of alternative monetary policy rules are evaluated for consideration of the european central bank ecb our main finding is that a simple rule that provides the reaction of the nominal interest rate to price inflation wage inflation and its previous observation can fairly well approximate the optimal monetary policy this result is robust to including an ecb preference on interest rate smoothing

a small open economy in depression lessons from canada in the 1930s this paper tests the hypothesis that idiosyncratic u s disturbances and their inter national propagation can account for the global depression exploiting common stochastic trends in u s and canadian interwar data we estimate a small open economy model for canada that decomposes output fluctuations into sources identifiable with world and country specific disturbances we find that the onset depth and duration of output collapse in both canada and the united states are primarily attributable to a common permanent output shock leaving little significant role for idiosyncratic disturbances originating in either economy

credible commitment and exchange rate stability canada s interwar experience in 1929 the canadian government floated the exchange rate which stayed at parity with sterling until 1931 when the canadian dollar appreciated with respect to sterling and depreciated with respect to the u s dollar this paper uses barro and gordon s reputation theory to explain the stability of the canadian dollar before 1931 and the subsequent depre ciation appreciation econometric analysis is then used to support the argument that between 1931 and 1933 the level of the exchange rate was determined by expectations of a return to parity with either sterling or the u s dollar

are non fundamental equilibria learnable in models of monetary policy abstract recent models of monetary policy can have indeterminacy of equilibria which is often viewed as a difficulty of these models we consider the significance of indeterminacy using the learning approach to expectations formation we employ expectational stability as a selection criterion for different equilibria and derive the expectational stability and instability conditions for forward looking multivariate models both without and with lags the results are applied to several monetary policies

learning by doing short sightedness and indeterminacy this article introduces firm specific learning by doing into a real business cycle rbc model this assumption results in indeterminacy of the wage over a large portion of the parameter space when firms use sufficiently high discount factors and when newly employed labour is relatively unproductive when firms and households use the same discount factor the effects of indeterminacy are limited to adding volatility to the wage rate if these discount factors differ however then indeterminacy also destabilises newly employed labour and total hours this result helps to explain the high amount of volatility that newly employed labour exhibits in the us data

is forward looking inflation targeting destabilizing the role of policy s response to current output under endogenous investment we show that with endogenous investment virtually all monetary policy rules that set a nominal interest rate in response solely to expected future inflation induce real indeterminacy in models with i staggered prices ii staggered prices and staggered wages and iii staggered prices staggered wages and firm specific capital in i policy s response to current output can help significantly in ensuring determinacy with an infinite labor supply elasticity but little with empirically plausible labor supply elasticity in ii responding to output always helps a great deal though under low price stickiness and without capital adjustment cost it may call for a moderate response to output in order to ensure determinacy for a wide range of response to inflation in iii even a tiny response to output can always render equilibrium determinate for a wide range of response to inflation

investment and monetary policy learning and determinacy of equilibrium we explore determinacy and expectational stability learnability of rational expectations equilibrium ree in new keynesian nk models that include capital using a consistent calibration across three different models labor only firm specific capital or an economy wide rental market for capital we provide a clear picture of when ree is determinate and learnable and when it is not under a variety of monetary policy rules our findings make a case for greater optimism concerning the use of such rules in nk models with capital while bullard and mitra s 2002 2007 findings for the labor only nk model do not always extend to models with capital we show that determinate and learnable ree can be achieved in nk models with capital if there is i plausible capital adjustment costs ii some weight given to output in the policy rule and or iii a policy of interest rate smoothing

what measure of inflation should a central bank target this paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability the paper first formalizes this problem and examines its microeconomic foundations it then shows how the weight of a sector in the stability price index depends on the sector s characteristics including size cyclical sensitivity sluggishness of price adjustment and magnitude of sectoral shocks when a numerical illustration of the problem is calibrated to u s data one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives

does trade openness matter for aggregate instability abstract this paper presents a cash in advance model of a small open economy and shows that whether an inflation targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade this result emerges regardless of whether prices are sticky or flexible in a closed economy as the monetary authority responds to movements in inflation the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect in a small open economy this policy also induces changes in the terms of trade which depending on the degree of openness can generate counteracting effects on consumption as a consequence the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy

monetary policy expectations and commitment commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies a number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy we assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents a reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts

does it matter for equilibrium determinacy what price index the central bank targets what inflation rate should the central bank target we address determinacy issues related to this question in a two sector model in which prices can differ in equilibrium we assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile the contribution of this paper is to demonstrate that a modified taylor principle holds in this environment if the central bank elects to target sector one and if it responds with a coefficient greater than unity to price movements in this sector then this policy rule will ensure determinacy across all sectors the results of this paper have at least two implications first the equilibrium determinacy criterion does not imply a preference to any particular measure of inflation second since the taylor principle applies at the sectoral level there is no need for a taylor principle at the aggregate level