price stability vs output stability tales of federal reserve administrations abstract this study disentangles policy parameters from those describing private sector behavior by simultaneously estimating an empirical model for inflation and output along with a loss function for the last three federal reserve administrations three important results emerge first the federal reserve appears to put more emphasis on price stability than output stability when the entire sample is considered second and more importantly the loss function parameters exhibit structural break at the time paul volcker was appointed chairman the accommodative characteristics of monetary policy were replaced with a more active policy towards controlling inflation finally interest rate smoothing is found to be an important feature of the monetary policymaking process for all three administrations

optimal capacity expansion over an infinite horizon the problem of choosing an optimal initial capacity expansion from a finite number of durable facility sizes is affected by potential future expansion decisions as we consider such expansions over longer and longer study horizons the optimal initial facility choice can fluctuate due to end of study effects we discuss an algorithm that will determine for arbitrary deterministic demand profiles how long a horizon is sufficient to reach stability in the first facility choice moreover it is shown that this first choice is the optimal first choice for the infinite horizon problem we also establish an explicit analytical formula for a study horizon guaranteed to provide a first facility size that followed by an infinite horizon expansion strategy will attain a discounted cost within a predetermined maximal error of the optimal infinite horizon cost

the neoclassical advent american economics at the dawn of the 20th century for the u s economy the last quarter of the 19th century brought the closing of the western frontier agricultural hardship in the south the rise of large corporations and trusts and the emergence of a serious labor movement the fledgling american economics profession struggled to document and prescribe for the confounding mix of industrialization urbanization and rural crisis in 1900 the relatively small community of serious economic researchers focused on applied issues in public policy and industrial organization the prominent institutionalist school strongly influenced by the almost millennial theories of the social gospel movement emphasized the inequities of the emerging economy and looked forward to a new more cooperative system of production on the eve of the 20th century john bates clark published in 1899 the distribution of wealth a theory of wages interest and profit with this volume neoclassicism matured into a major intellectual force within american economic thought with clark as its defining figure clark s analytical approach and his normative purposes hardly went unchallenged moreover the great majority of economists in the united states continued to work in the institutionalist vein up to world war ii nevertheless by viewing the american neoclassical advent in the context of its own time we can gain a deeper understanding of both american economics at the turn of the 20th century and the early character of the school that came to dominate our discipline

central bank preferences and macroeconomic equilibrium abstract we investigate the behavior of an optimizing monetary authority in an economy described by a simple as ad model we develop a simple methodology for deriving the optimal policy and the associated model solution for various forms of the authority s objectives in our empirical work we focus on one of these specifications in which the authority cares about both the rate of inflation and the level of price innovations which boost real output in our model along the lines of barro and gordon 1983b estimating the model on post war us data we find that the revealed weight on price surprises is significant but only around a third of that on inflation the estimated elasticity of output with respect to price surprises is around one quarter but statistically insignificant

inflation contracts and inflation targets under uncertainty why we might need conservative central bankers this paper compares the relative effectiveness of inflation contracts and inflation targets in the presence of uncertainty regarding the central bank s preferences and the underlying output target the model explains why discretion may be superior to a delegation solution we also show that there might be the need to combine inflation targets and contracts with the appointment of a rogoff type conservative central banker if contracts and targets cannot be made state contingent and that less flexible inflation targets may be appropriate with uncertain central bank preferences

singular focus or multiple objectives what the data tell us about inflation targeting in latin america proquest denotes formulae omitted introductionin the last decade and a half several latin american countries have adopted inflation targeting as their monetary framework moving away from other intermediate targets such as monetary aggregates and allowing at least on paper more exchange rate flexibility while the literature so far has not delivered a clear verdict on the impact of inflation targeting on macro economic performance in general particularly in comparison to other mon etary frameworks that have faced the same global environment it is evident that countries that have adopted inflation targeting have generally succeeded both in stabilizing inflation at relatively low rates and in anchoring the public s expectations at levels near the target 1one recurring question that arises regarding the use of inflation targeting concerns the flexibility that policymakers need to implement it namely to what extent should exchange rate fluctuations or financial stability concerns also be incorporated into the policy of a central bank that aims at achiev ing a preannounced target for inflation this is particularly relevant given that such targeting relies critically on policy credibility and effective com munication with the public thus the perception that multiple and possibly conflicting objectives are being pursued might undermine such credibility thereby endangering the integrity of the policy regarding the exchange rate the question is whether inflation targeting can or should accommodate a certain degree of fear of floating calvo and reinhart 2002 that is a policy reaction directed at preventing or smooth ing out exchange rate fluctuations in the most narrow sense it is clear that central banks using inflation targeting should respond to these movements when via a pass through they are likely to be transmitted to inflation or inflationary expectations however beyond this pass through effect there is also a case for reacting to exchange rate movements as these could gen erate supply side effects through their impact on the prices of intermediate inputs they could also affect competitiveness and particularly in highly dollarized economies lead to balance sheet effects that feed into financial instability in fact there is evidence that countries using inflation targeting do react to exchange rate movements estimating a monetary reaction function for a panel of advanced and emerging economies during 1996 2011 munoz and schmidt hebbel 2012 find that the short term policy rate in countries both with and without inflation targeting known as it reacts to changes in the nominal exchange rate using a similar approach but focusing on emerging economies aizenman hutchinson and noy 2011 find that the policy rate reacts to changes in the real exchange rate particularly in commodity export ing countries note that it is not possible to determine from these studies whether there is a separate exchange rate objective at play as opposed to the exchange rate being treated as one more signal regarding future inflation ary pressures from a different perspective berganza and broto 2012 focus their attention directly on foreign exchange forex interventions by central banks consistent with the presumed greater exchange rate flexibility of it they find that exchange rates are indeed more volatile in inflation targeting countries than in countries that do not target inflation however forex inter vention is far from absent in the targeting countries and it is found to be effective in reducing exchange rate volatility on the second question whether financial stability concerns should be incorporated into an inflation targeting framework there is also a case for expanding the set of instruments at the disposal of policymakers making use of macroprudential tools such as dynamic provisioning countercyclical capital requirements and loan to value limits and even complementing these instruments with an explicit reaction of the policy rate to an appropriate financial stability indicator

the inflation bias when the central bank targets the natural rate of unemployment abstract this paper studies the proposition that an inflation bias can arise in a setup where a central banker with asymmetric preferences targets the natural unemployment rate preferences are asymmetric in the sense that positive unemployment deviations from the natural rate are weighted more or less severely than negative deviations in the central banker s loss function the bias is proportional to the conditional variance of unemployment the time series predictions of the model are evaluated using data from g7 countries econometric estimates support the prediction that the conditional variance of unemployment and the rate of inflation are positively related

estimating local welfare generated by an nfl team under credible threat of relocation this study offers the opportunity to examine the welfare contribution of the minnesota vikings to minnesota households in the context of a credible threat of team relocation we find the credibility of the threat of relocation is essential to providing unbiased estimates of welfare this study utilizes contingent valuation methodology cvm and a random utility model rum to analyze minnesotans decision making mechanisms for supporting a new stadium initiative while previous studies have attempted to measure the welfare associated with a sports franchise we develop and discuss bias that may be imparted to estimates when the researcher fails to calculate a choke price further we develop an unbiased approach to identify welfare when respondents perceive a risk of losing the franchise the range of welfare contribution by the vikings to households in minnesota is 445 3 million to 1 571 3 million according to a 95 confidence interval based on our study

level slope curvature of the sovereign yield curve and fiscal behaviour abstract we study fiscal behaviour and the sovereign yield curve in the us and germany we obtain the latent factors level slope and curvature with the kalman filter and use them in a var with macro fiscal and financial stress variables in the us fiscal shocks generate an immediate response of the short end of the yield curve associated with monetary policy lasting 6 8 quarters followed by a response of the whole yield curve lasting 3 years with an implied elasticity of long term yields of 80 for the government debt shock and 48 for the budget balance shock in germany fiscal shocks have entailed no significant reactions of the yield curve shape and no response of the monetary policy interest rate notably after 1999 only in the case of debt shocks there is a short lived decrease in the medium end of the yield curve in the following 2nd and 3rd quarters

on the loss function of the bank of canada a note abstract based on the approach advanced by elliott et al elliott g komunjer i timmermann a 2005 estimation and testing of forecast rationality under flexible loss review of economic studies 72 1107 1125 we studied whether the inflation and output growth projections published by the bank of canada are consistent with an asymmetric loss function current year projections provide no signs of asymmetry but next year projections do the hypothesis of rationality of the projections can be rejected under symmetric loss but not under asymmetric loss

outsiders at the bank of england s mpc the monetary policy committee mpc of the bank of england which was established in may 1997 consists of five internal and four external members we study the voting record and show that insiders dissent rarely and typically for higher rather than lower rates whereas outsiders dissent more often prefer lower rates and disagree with the majority when economic growth slows moreover their dissents forecast future interest rate changes we show that a model in which outsiders dislike output below potential more than output above replicates the observed voting pattern well

monetary policy rules macroeconomic stability and inflation a view from the trenches i estimate a forward looking monetary policy reaction function for the federal reserve for the periods before and after paul volcker s appointment as chairman in 1979 using information that was available to the fomc in real time from 1966 to 1995 the results suggest broad similarities in policy and point to a forward looking approach to policy consistent with a strong reaction to inflation forecasts during both periods this contradicts the hypothesis based on analysis with ex post constructed data that the instability of the great inflation was the result of weak fomc policy responses to expected inflation a difference is that prior to volcker s appointment policy was too activist in reacting to perceived output gaps that retrospectively proved overambitious drawing on contemporaneous accounts of fomc policy i discuss the implications of the findings for alternative explanations of the great inflation and the improvement in macroeconomic stability since then

monetary policy regime shifts new evidence from time varying interest rate rules i introduction interest rate policies are complex decisions they rely on a multitude of indicators and models and are by nature associated to events not always captured by relatively simple econometric tools nonetheless there is now a widespread consensus that the class of simple policy rules examined by recent microfounded models of the economy generates stabilization properties that are very close to those of optimal feedback rules woodford 2003 feedback rules nowadays are customary tools for monetary policy analysis furthermore rule based policymaking is generally accepted as the reference framework of monetary policy strategies bank of england 1999 european central bank 2004 monetary policy reaction functions summarize the importance that policymakers attach to policy objectives as well as their views on the structure of the economy traditionally those functions are estimated as constant parameters policy rules this is a plausible simplification but a number of reasons suggest that rules should allow for instability and parameter variation over time constant parameter reaction functions might blur the role played by various real world factors 1 model uncertainty 2 conflicting objectives 3 shifting preferences on policymakers choices and 4 nonlinearities in particular reduced form policy models that do not allow for shifts and asymmetries in behavioral relationships could produce misleading results dynamic stochastic general equilibrium dsge models represent one potentially promising way of overcoming these problems this increasingly popular approach is based on microfounded descriptions of the economy recent studies also provide novel techniques to estimate and evaluate linearized dsge models using bayesian methods del negro et al 2007 the bayesian framework represents a natural setup to account for model and parameter uncertainty however the dsge approach imposes a large number of restrictions on the data in the specific context of interest rate rules its ability to generate qualitative and robust assessments on monetary policy conduct appears problematic this article provides some new evidence on interest rate policies in five large economies united states united kingdom germany france and italy through the implementation of a time varying parameters approach tvp henceforth we estimate policy rules as summarized by simple reaction functions defined in terms of expected inflation and output gaps in contrast with most existing analyses we employ a tvp methodology based on the kalman filter algorithm to estimate our instrument rules in practice we allow the policy rules coefficients to vary over time what we obtain are estimates of the state vector for each observation in our sample these estimates can then describe the evolution of monetary policy over time moreover we evaluate the conditional variance of interest rates implied by our tvp methodology a host of factors may cause shifts in the estimated parameters of monetary policy reaction functions some of them may be due to institutional reforms like the introduction of inflation targets or the move to an exchange rate peg or a fixed exchange rate in estimating reaction functions defined in terms of final policy objectives one aims at capturing the relative emphasis placed by policymakers on the attainment of output and inflation targets over time such emphasis might evolve therefore one needs to model the observer s view on the likelihood that these shifts are smooth transitions or abrupt regime changes by allowing the weights of the policy rule to vary only gradually we are able to identify relevant shifts in policy conduct regardless of their exact configuration as argued at length in the next section our approach is better suited than conventional fixed parameter techniques to deal with lucas critique and more in general with the issue of structural change

loss aversion and the asymmetric transmission of monetary policy there is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity while price responses display no sizeable asymmetry to rationalize these facts we develop a dynamic general equilibrium model where households utility depends on consumption deviations from a reference level below which loss aversion is displayed state dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and inflation contractions face the central bank with higher responsiveness of output to interest rate changes as well as a flatter aggregate supply schedule

inflation targeting under asymmetric preferences this paper develops and estimates a game theoretical model of inflation targeting where the central banker s preferences are asymmetric around the targeted rate specifically positive deviations from the target can be weighted more or less severely than negative ones in the central banker s loss function it is shown that some of the previous results derived under the assumption of symmetry are not robust to this generalization of preferences estimates of the central banker s preference parameters for canada sweden and the uk are statistically different from the one implied by the commonly used quadratic loss function

forecast frequency in rolling horizon hedging heuristics for capacity expansion this paper describes a simulation study of the effect of forecast revisions and hedges against demand uncertainty in a rolling horizon heuristic for capacity expansion the model is based on data collected in the utilities division of a large chemical manufacturing plant a seasonal integrated moving average model for the demand is used to generate forecasts while capacity additions are determined by applying a simple timing rule to various hedges around the forecast the simulation results indicate that hedging forecasts by their prediction limits rather than a fixed buffer significantly reduces undercapacity at the expense of a small increase in capacity cost the prediction limit hedge is more robust to delays in reforecasting

bias in federal reserve inflation forecasts is the federal reserve irrational or just cautious abstract inflation forecasts of the federal reserve seem to have systematically under predicted inflation from the fourth quarter of 1968 until volcker s appointment as chairman and to systematically over predict it afterwards until the second quarter of 1998 furthermore under quadratic loss commercial forecasts seem to have information not contained in those forecasts to investigate the cause of this apparent irrationality this paper recovers the loss function implied by federal reserve s inflation forecasts the results suggest that the cost of having inflation above an implicit time varying target was larger than the cost of having inflation below it for the period since volcker and that the opposite was true for the pre volcker era once these asymmetries are taken into account the federal reserve s inflation forecasts are found to be rational

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

the central banker as a risk manager estimating the federal reserve s preferences under greenspan we derive a natural generalization of the taylor rule that links changes in the interest rate to the balance of the risks implied by the dual objective of sustainable economic growth and price stability this monetary policy rule reconciles economic models of expected utility maximization with the risk management approach to central banking within this framework we formally test and reject the standard assumption of quadratic and symmetric preferences in inflation and output that underlies the derivation of the taylor rule our results suggest that fed policy decisions under greenspan were better described in terms of the fed weighing upside and downside risks to their objectives rather than simply responding to the conditional mean of inflation and of the output gap

optimal monetary policy revisited does considering us real time data change things croushore 2011 and others have noted that monetary policy may be sensitive to inconsistencies between real time data available to policy makers when making their decisions and revised data which more accurately measureeconomic performance this paper extends the asymmetric preferencemodel suggested by ruge murcia 2003 in order to focus on these inconsistencies which arise because of the long lag between the real time data release and the revised data release we focus on two related monetary policy models in both models the central banker targets a weighted average of revised and real time inflation the models differ by what the second variable is in the monetary objective function with the first model using a weighted average of revised and real time output whereas the second model uses a weighted average of revised and real time unemployment our models identify several new potential sources of inflation bias due to data revisions in addition to the ones previously suggested in the literature our empirical results suggest that the federal reserve bank mainly focuses on targeting revised data for all three variables but it does weigh real time data too as a consequence the inflation bias induced by real time data increases by 12 6 basis points on average but this figure becomes roughly twice as large at the start of recessions

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

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

application of multi steps forecasting for restraining the bullwhip effect and improving inventory performance under autoregressive demand recent research suggests that the bullwhip effect or increasing variability of inventory replenishment orders as one moves up a supply chain illustrates inventory management inefficiencies this paper quantifies the bullwhip effect in the case of serially correlated external demand if autoregressive models are applied to obtain multiple steps demand forecasts a materials requirements planning mrp based inventory management approach is proposed to reduce the order variance simulation modeling is used to investigate the impact of the forecasting method selection on the bullwhip effect and inventory performance for the most downstream supply chain unit the mrp based approach is shown to reduce magnitude of the bullwhip effect while providing the inventory performance comparable to that of a traditional order up approach the application of autoregressive models compares favorably to other forecasting methods considered according to both the bullwhip effect and inventory performance criteria

inflation targets and contracts with uncertain central banker preferences within a standard model of monetary delegation the authors show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker s preferences the optimal combination of a contract and a target performs best and eliminates the inflation bias and any variability not associated with supply shocks however variability due to shocks is enhanced by uncertain central banker preferences quadratic contracts are shown to overcome this problem partly but the advantages of delegation may still be dominated by the excess variability due to shocks hence the credibility stabilization tradeoff is restored

a simple empirical measure of central banks conservatism in this paper we suggest a simple empirical and model independent measure of central banks conservatism based on the taylor curve this new indicator can easily be extended in time and space whatever the underlying monetary regime of the considered countries we demonstrate that it evolves in accordance with the monetary experiences of 32 oecd member countries from 1980 and is largely equivalent to the model based measure provided by krause mendez southern economic journal 2005 we finally bring forward the interest of such an indicator for further empirical analysis dealing with the preferences of central banks

policy regime changes judgment and taylor rules in the greenspan era this paper investigates policy deviations from linear taylor rules motivated by the risk management approach followed by the fed during the greenspan era we estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy makers judgment proxied by economically meaningful variables drives the transition across policy regimes we find that ignoring judgment induced nonlinearities while estimating taylor rules has remarkable costs in terms of fit above 250 bps in 10 quarters although linear taylor rules describe well the broad contours of monetary policy they fail to detect relevant policy decisions driven by policy makers judgment

inflation targeting some extensions previous analyses of the implementation of inflation targeting are extended to monetary policy responses to different shocks consequences of model uncertainty and effects of interest rate smoothing and stabilization model uncertainty output stabilization and interest rate stabilization or smoothing all call for a more gradual adjustment of the conditional inflation forecast toward the inflation target the conditional inflation forecast is the natural intermediate target during inflation targeting the optimal way of reacting to shocks is hence to check how they affect the inflation forecast and then take the appropriate action jel classification e42 e52 e58

retrospectives cost benefit analysis and the classical creed cost bene t analysis provides the dominant economic approach with whicheconomists talk to each other to government bureaucrats and to the general laityabout the desirability of public programs and investment projects cost bene tstudies have pushed economic thinking into public debates and reciprocally havebrought an uncommon level of public scrutiny to the technical deliberations ofeconomists precisely because cost bene t analysis addresses serious real world decisions this widely used and frequently abused tool of applied economics has had a bumpyhistory last year newspaper headlines across the country announced that apentagon investigation had found systematic manipulation of net bene t estimatesat the army corps of engineers for example grunwald 2000 the corps hasbeen the political godfather of cost bene t analysis in the united states but ithas also long been suspected of an institutional bias in favor of projects that canadd signi cantly to its own budget allocations re ecting on the early record of

the nairu unemployment and monetary policy this paper examines the precision of conventional estimates of the nairu and the role of the nairu and unemployment in forecasting inflation the authors find that although there is a clear empirical phillips relation the nairu is imprecisely estimated forecasts of inflation are insensitive to the nairu and there are other leading indicators of inflation that are at least as good as unemployment this suggests deemphasizing the nairu in public discourse about monetary policy and instead drawing on a richer variety of leading indicators of inflation

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

enemies or allies henry george and francis amasa walker one century later an evaluation and commemoration of two pioneering american economists one century after their deaths in 1897 biographical sketches are followed by expositions and assessments of their contributions to economics areas covered include distribution theory the explanation of poverty george s single tax proposal the business cycle and money and statistics a novel interpretation of george s treatment of rent is provided also covered are the parallels and antagonisms between george and walker and the uneasy relationship between george and the academic economists of the era an appendix provides a brief guide to the literature

macroeconomic stability and the preferences of the fed a formal analysis 1961 98 the rate of inflation in the u s has declined from an average of 4 5 in the period 1960 79 to an average of 3 6 in 1980 98 between those two periods the standard deviations of inflation and the output gap have also declined these facts can be attributed to the interaction of three possible factors a shift in central bank preferences a reduction in the variability of aggregate supply shocks and a more efficient conduct of monetary policy in this paper we identify the relative roles of these factors our framework is based on the estimation of a small structural macro model for the u s economy jointly with the first order conditions which solve the intertemporal optimization problem faced by the fed overall our results indicate that the policy preferences of the fed and in particular the implicit inflation target have changed drastically with the advent of the volcker greenspan era in addition we find that the variance of supply shocks has been lower and monetary policy has been conducted more efficiently during this period

estimating central banks preferences from a time varying empirical reaction function abstract we estimate monetary policy reaction functions for the united states the united kingdom and germany using a markov switching model that allows for shifts in the coefficients of the central bank s reaction function as well as for independent shifts in the residual variance the results indicate that central bank policy can be characterized as falling into a low and a high inflation regime over time all central banks have assigned changing weights to inflation and the output gap switching in the residual variance turns out to be important for the fit of the model as a reaction function is a reduced form coefficients embody preference parameters as well as parameters characterizing the structure of the economy to recover the central banks preferences we estimate the preference parameters jointly with a small model of the economy the results show that the bundesbank has placed a relatively higher weight on inflation than the fed moreover for the bundesbank and the fed the differences between both regimes seem to originate mainly from a changing preference for interest rate smoothing

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

optimal monetary policy with a nonlinear phillips curve abstract the analysis of optimal discretionary monetary policy under a non linear phillips curve is shown to yield results that are in marked contrast to conventional results that are drawn from the linear paradigm specifically we show that there exists a deflation bias in expected output while the inflation bias cannot be signed preference uncertainty however adds to expected inflation

inflation targeting in a small open economy empirical results for switzerland abstract this paper extends mccallum s 1987 nominal targeting rule to a small open economy by allowing for feedback from the exchange rate instead of setting parameters in a mccallum type targeting rule and simulating the parameters are estimated using a markov switching model we argue that a model of discrete parameter changes should be adept at capturing sudden changes in policy regime such as changes in the degree to which monetary policy admits feedback from the exchange rate we examine the legitimacy of an inflation targeting rule with occasional exchange rate feedback to describe swiss monetary policy over the past twenty years

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

uncovering financial markets beliefs about inflation targets this paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long term interest rates and inflation when the latter is subject to a targeting policy by the central bank in an empirical application to the canadian inflation target zone results indicate that financial markets perceive the band to be of approximately the same width as announced but asymmetrically distributed around the official target this finding suggests that in practice the monetary authority might attach different weights to positive and negative inflation deviations from the target copyright 2000 john wiley sons ltd

regime switching and monetary policy measurement this paper applies regime switching methods to the problem of measuring monetary policy policy preferences and structural factors are specified parametrically as independent markov processes interaction between the structural and preference parameters in the policy rule serves to identify the two processes the estimates uncover policy episodes that are initiated by switches to dove regimes shown to granger cause both nber recessions and the romer dates these episodes imply real effects of monetary policy that are smaller than those found in previous studies

an empirical assessment of optimal monetary policy in the euro area we estimate a new keynesian dsge model for the euro area under alternative descriptions of monetary policy discretion commitment or a simple rule after allowing for markov switching in policy maker preferences and shock volatilities this reveals that there have been several changes in euro area policy making with a strengthening of the anti inflation stance in the early years of the erm which was then lost around the time of german reunification and only recovered following the turmoil in the erm in 1992 the ecb does not appear to have been any more conservative as aggregate euro area policy was under bundesbank leadership the estimates also suggest that the most appropriate description of policy is that of discretion with no evidence of commitment in the euro area as a result although both good luck and good policy played a role in the moderation of inflation and output volatility in the euro area the welfare gains would have been substantially higher had policy makers been able to commit adopting a flexible price level target would lead to outcomes close to commitment

forecast uncertainty and the taylor rule abstract in this paper we derive a modification of a forward looking taylor rule by integrating two variables that measure the uncertainty of inflation and gdp growth forecasts into an otherwise standard new keynesian model we show that certainty equivalence in new keynesian models is a consequence of log linearization and that a second order taylor approximation leads to a reaction function that includes the uncertainty of macroeconomic expectations to test the model empirically we use the standard deviation of individual forecasts around the median consensus forecast as a proxy for forecast uncertainty our sample covers the euro area the united kingdom and the united states for the period 1990q1 2016q4 we find that the bank of england and the european central bank have a significantly negative reaction to inflation forecast uncertainty our findings also reveal that the federal reserve bank of england lowers raises its interest rate in response to higher gdp growth forecast uncertainty we conclude by offering some implications for optimal monetary policy rules and central bank watchers

capacity expansion under stochastic demands we consider the problem of optimally meeting a stochastically growing demand for capacity over an infinite horizon under the assumption that demand for product follows either a nonlinear brownian motion or a non markovian birth and death process we show that this stochastic problem can be transformed into an equivalent deterministic problem consistent with earlier work by a manne the equivalent problem is formed by replacing the stochastic demand by its deterministic trend and discounting all costs by a new interest rate that is smaller than the original in approximate proportion to the uncertainty in the demand

risk management nonlinearity and aggressiveness in monetary policy the case of the us fed we contribute to the empirical literature on the risk management approach to monetary policy by estimating regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets using quarterly data for the greenspan period we find that i risk in the inflation outlook and in financial markets are a more powerful driver of monetary policy regime changes than variables typically suggested in the literature such as the level of inflation and the output gap ii estimation of regime switching models shows that the response of the us fed to the inflation outlook is invariant across policy regimes iii however in periods of high economic risk monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances and iv the us fed is estimated to have responded aggressively to the output gap in the late 1980s and beginning of the 1990s and in the late 1990s and early 2000s these results are consistent with mishkin 2008 s view that in periods of high economic risk monetary authorities should respond aggressively to changes in macroeconomic conditions while the degree of inertia should be lower than in normal circumstances

ireland and switzerland the jagged edges of the great inflation abstract ireland and switzerland both had rising inflation during the early 1970s but their experiences diverged thereafter so that they form a rare example of two countries whose inflation rates are poorly correlated with one another over the great inflation period this paper proposes that the monetary policy neglect hypothesis can account for both countries experiences extensive archival evidence is considered for each country regarding the doctrines that guided 1970s policymaking this evidence establishes that switzerland s better record is accounted for by the competition between monetary and nonmonetary views of inflation being resolved earlier and more decisively in favor of the monetary view in ireland by contrast nonmonetary views of inflation dominated policymaking throughout the 1970s

asymmetric monetary policy rules in australia abstractin this study the hypothesis that the reserve bank of australia rba implements an asymmetric monetary policy rule is tested we estimate both linear and asymmetric monetary policy reaction functions for the period before inflation targeting was adopted for the period when inflation targeting was explicitly adopted and for the full sample period the results of the linear monetary policy rules are consistent with the estimates reported from other studies that estimate linear monetary policy rules for australia on the other hand the results of estimating the asymmetric monetary policy rules for the pre inflation targeting period shows that the rba had reacted symmetrically suggesting that it had acted with the same aggressiveness towards both inflation and output gaps of the same magnitude over both phases of the business cycle however for the inflation targeting period the results show that the rba had reacted asymmetrically in its policy response to the inflation gap output gap or both

inflation targeting credibility and non linear taylor rules abstract in this paper we systematically evaluate how central banks respond to deviations from the inflation target we present a stylized new keynesian model in which agents inflation expectations are sensitive to deviations from the inflation target to re establish credibility monetary policy under discretion sets higher interest rates today if average inflation exceeded the target in the past moreover the central bank responds non linearly to past inflation gaps this is reflected in an additional term in the central bank s instrument rule which we refer to as the credibility loss augmenting a standard taylor 1993 rule with the latter term we provide empirical evidence for the interest rate response for a sample of five inflation targeting it economies we find first that past deviations from it feed back into the reaction function and that this influence is economically meaningful deterioration in credibility ceteris paribus forces central bankers to undertake larger interest rate steps second we detect an asymmetric reaction to positive and negative credibility losses with the latter dominating the former

accountability transparency and inflation targeting inflation targeting regimes define a performance measure for the central bank a regime that places a large small weight on achieving the target is analogous to a high low powered incentive scheme high powered incentive structures promote accountability but may distort stabilization policy the optimal power under inflation targeting is derived under perfect and imperfect information the fundamental trade off between accountability and stabilization depends on the degree of transparency defined as the ability to monitor the central bank s performance multiplicative uncertainty increases the optimal weight to place on achieving an inflation target