optimal interest rate rules asset prices and credit frictions we study optimal taylor type interest rate rules in an economy with credit market imperfections our analysis builds on the agency cost framework of carlstrom and fuerst 1997 agency costs net worth and business fluctuations a computable general equilibrium analysis american economic review 87 893 910 which we extend in two directions first we embed monopolistic competition and sticky prices second we modify the stochastic structure of the model in order to generate a countercyclical premium on external finance this is achieved by linking the mean distribution of investment opportunities faced by entrepreneurs to aggregate total factor productivity we model monetary policy in terms of simple welfare maximizing interest rate rules we find that monetary policy should respond to increases in asset prices by lowering interest rates however when monetary policy responds strongly to inflation the marginal welfare gain of responding to asset prices vanishes within the class of linear interest rate rules that we analyze a strong anti inflationary stance always attains the highest level of welfare

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

financial market illiquidity shocks and macroeconomic dynamics evidence from the uk we examine the link between financial market illiquidity and macroeconomic dynamics by fitting a bayesian time varying parameter var with stochastic volatility to uk data from 1988q1 to 2016q4 we capture liquidity conditions in the stock market using a battery of illiquidity proxies this paper departs from previous studies examining macro financial linkages by using theoretically grounded sign restrictions and conducting structural inference in a non linear framework we document both statistically significant differences in the transmission of these shocks and substantial increases in the economic importance of these shocks during the 2008 recession

liquidity effects and the monetary transmission mechanism several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment existing quantitative general equilibrium models which allow for capital accumulation are inconsistent with this view there does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates output and employment to a money supply shock however a key shortcoming of these models is that they cannot rationalize persistent liquidity effects this paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence we argue that once a simplified version of the model in christiano and eichenbaum 1991 is modified to allow for extremely small costs of adjusting sectoral flow of funds positive money shocks generate long lasting quantitatively significant liquidity effects as well as persistent increases in aggregate economic activity

the output inflation tradeoff and central bank reform evidence from new zealand the 1989 reserve bank of new zealand act provides a natural experiment in which the effects of institutional change on economic relationships can be studied the act set price stability as the single objective of monetary policy and gave the bank great independence reforms of this nature may lead to a greater short run output inflation tradeoff by altering optimal stabilisation policy and wage indexation allowing for environments where learning about the new regime is assumed to be rapid as well as slow we find that a large rise in the new zealand tradeoff has occurre d since implementation of the act

monetary policy strategies for latin america the authors examine possible monetary policy strategies for latin america that may help lock in the gains the region attained in the fight against inflation in the 1990s instead of focusing the debate about the conduct of monetary policy on whether the nominal exchange rate should be fixed or flexible the focus should be on whether the monetary policy regime appropriately constrains discretion in monetary policymaking three basic frameworks deserve serious discussion as possible long run strategies for monetary policy in latin america the authors examine the advantages and disadvantages of a hard exchange rate peg monetary targeting and inflation targeting in light of monetary policy s recent track record in several latin american countries looking for clues about which of the strategies might be best suited to economies in the region the answer it depends on the country s institutional environment some countries appear not to have the institutions to constrain monetary policy if discretion is allowed in those countries there is a strong argument for hard pegs including full dollarization that allow little or no discretion to monetary authorities in countries such as chile which can constrain discretion inflation targeting is likely to produce a monetary policy that keeps inflation low yet appropriately copes with domestic and foreign shocks monetary targeting as a strategy for latin america is not viable because of the likely instability of the relationship between inflation and monetary aggregates of which there is ample international evidence no monetary strategy can solve the basic problems that have existed in latin american economies for a long time the authors welcome the recent move in latin american countries toward inflation targeting but say no policy will succeed unless government policies also create the right institutional environment

stock markets banks and growth panel evidence this paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976 98 and applying recent gmm techniques developed for dynamic panels on balance we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity omitted variables or unobserved country specific effects

inflation targeting in brazil constructing credibility under exchange rate volatility abstract this paper assesses the challenges faced by the inflation targeting regime in brazil the inflation targeting framework has played a critical role in macroeconomic stabilization we stress two important challenges construction of credibility and exchange rate volatility the estimations indicate the following results i the inflation targets have worked as an important coordinator of expectations ii the central bank has reacted strongly to inflation expectations iii there has been a reduction in the degree of inflation persistence and iv the exchange rate pass through for administered or monitored prices is two times higher than for market prices

inflation targeting and inflation performance a comparative analysis this article examines how the impact of inflation targeting on inflation performance depends on the choice of country samples adoption dates time periods and methodological approaches we apply two different estimation methods difference in differences and propensity score matching for our sample of 25 advanced and 59 emerging and developing countries over the period 1985 to 2011 our findings suggest that distinguishing countries by economic development is crucial as no effect of inflation targeting is found for advanced economies whereas the results suggest a significant negative effect of inflation targeting on inflation in emerging and developing countries the results are robust to the methodology used for the analysis

does informality facilitate inflation stability abstract informality is a structural trait in emerging economies affecting the behavior of labor markets financial access and economy wide productivity this paper develops a simple general equilibrium closed economy model with nominal rigidities labor and financial frictions to analyze the transmission of shocks and of monetary policy in the model the informal sector provides a flexible margin of adjustment to the labor market at the cost of a lower productivity in addition only formal sector firms have access to financing which is instrumental in their production process in a quantitative version of the model calibrated to mexican data we find that informality i dampens the impact of demand and financial shocks as well as of technology shocks specific to the formal sector on wages and inflation but ii heightens the inflationary impact of aggregate technology shocks the presence of an informal sector also increases the sacrifice ratio of monetary policy actions from a central bank perspective the results imply that informality mitigates inflation volatility for most type of shocks but makes monetary policy less effective

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

does inflation targeting affect the dispersion of inflation expectations in this paper we examine the effect of having an inflation targeting framework on the dispersion of inflation forecasts from professional forecasters we use a panel data set of 25 countries including 14 inflation targeters with 16 years of monthly information we find that the dispersion of long run inflation expectations is smaller in targeting regimes after controlling for country specific effects time specific effects the level and the variance of inflation disinflation periods and global inflation on average the full effect is not observed until the third year after implementation of inflation targeting when we differentiate between developed and developing countries the dispersion of inflation expectations after inflation targeting is smaller and statistically significant only in developing countries

booms and busts in the uk housing market the often volatile behaviour of uk house prices between 1957 and 1994 is analysed in an annual econometric model theory suggests that financial liberalisation of mortgage markets in the 1980s should have led to notable shifts in house price behaviour the evidence supports the predictions of theory suggesting shifts took place in wealth effects as in the consumption function and that real interest rates and income expectations became more important the presence of transactions costs suggests important nonlinearities in house price dynamics the paper also contains an explicit econometric treatment of expectations demography supply spillovers from the rented sector and of composition biases in the official house price index

the macroeconomic effects of fiscal policy we investigate the macroeconomic effects of fiscal policy using a bayesian structural vector autoregression b svar approach we identify fiscal policy shocks via a partial identification scheme but also i include the feedback from government debt ii look at the impact on the composition of output iii assess the effects on asset markets iv use quarterly data and v analyse empirical evidence from the us the uk germany and italy the results show that government spending shocks in general have a small effect on gross domestic product gdp lead to important crowding out effects have a varied impact on housing prices and generate a quick fall in stock prices government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices the empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model

inflation targeting and inflation expectations in mexico in this article we analyse inflation expectations in mexico after a review of the theoretical and empirical literature we apply unit root normality and cointegration tests to the data provided by banco de mexico banxico in the survey on the expectations of the private sector economics specialists our results reject the null hypothesis of normality for inflation expectations over the period 2004 01 2011 12 the exchange rate has become one of the most relevant variables in the transmission mechanism of monetary policy in a small open economy in this regard we show the existence of a long run relationship between nominal exchange rate and interest rate where inflation expectations matter for long term dynamics

does inflation targeting matter a reassessment this paper uses a number of identification approaches using instrumental variables assumptions about heteroscedasticity and panel fixed effects to estimate the effect of inflation targeting on inflation generally it finds the effect is small and insignificant

a disaggregated analysis of asymmetrical behaviour in the uk housing market potential asymmetrical adjustment in uk house prices is considered the present analysis extends previous research in a number of crucial ways first a seminal examination of asymmetry in regionally disaggregated uk house prices is undertaken secondly data are examined which are further disaggregated according to the age or vintage of the housing stock however the major development concerns the application of a non parametric testing approach to detect cyclical asymmetry in contrast to previously employed tests in the economics literature the triples test employed possesses high power and is not sensitive to outliers it is found that extensive asymmetry is present in uk house prices with cyclical peaks typically being greater in magnitude than corresponding troughs the implications of these findings for the comparison and construction of economic theories of the housing market the specification of econometric models and the construction and implementation of economic policy are noted

a time series approach to test a change in inflation persistence the mexican experience when a central bank commits credibly to a nonaccommodative monetary policy observed inflation should be a stationary process in countries where for a variety of reasons the determinants of inflation could lead it to follow a nonstationary process the adoption of a credible disinflationary programme should therefore induce a fundamental change in the stochastic process governing inflation and in particular should diminish its persistence this article studies the time series properties of both inflation and core inflation during the 1995 2006 period for the mexican economy using recently developed techniques to detect a change in the persistence of economic time series consistently with the adoption of an inflation targeting framework the results suggest that inflation in mexico seems to have indeed switched from a nonstationary to a stationary process around the end of year 2000 or the beginning of 2001

bayesian evaluation of dsge models with financial frictions we evaluate two most popular approaches to implementing financial frictions into dsge models the bernanke gertler and gilchrist 1999 setup where frictions affect the price of loans and the kiyotaki and moore 1997 model where they concern the quantity of loans we take both models to the data and check how well they fit it on several margins overall comparing the models favors the bernanke gertler and gilchrist framework however even this model does not make a clear improvement over the new keynesian benchmark in terms of marginal likelihood and similarity of impulse responses to those obtained from a var

global liquidity transmission to emerging market economies and their policy responses abstract this paper analyzes the transmission of global liquidity gl from advanced economies aes to emerging market economies emes we distill gl momenta from the macro financial data of aes through a factor model and identify them with sign restrictions as policy driven market driven and risk averseness factors using a panel factor augmented var analysis we then investigate eme responses to shocks to gl momenta a positive shock to policy driven liquidity boosts growth in emes elevating stock prices and currency values while a shock to risk averseness has a largely opposite effect a market driven gl expansion boosts stock markets and lowers funding costs increasing competitiveness and current account balance inflation targeting emes are found to fare better than emes under alternative regimes in terms of macro financial volatility

monetary policy and inflation expectations in latin america long run effects and volatility spillovers this paper uses multiple cointegration analysis to estimate simultaneously a monetary reaction function and the determinants of expected inflation for brazil chile colombia and mexico in addition m garch modeling is used to test for the presence of volatility spillovers between the monetary stance and inflation expectations the analysis shows that there are long term relationships between the interest rate expected inflation and the inflation target and that greater volatility in the monetary stance increases the volatility of expected inflation in brazil colombia and mexico

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

assessing the performance of inflation targeting lite countries this paper deals with what is referred to in the literature as the inflation targeting lite itl countries these are a category of emerging countries whose main characteristics are that they are least developed and small economies that pursue it they use inflation targeting to define their monetary policy framework but for a number of reasons they are not in a position to put top priority to it in relation to other objectives this paper deals with a set of itl countries for which consistent data could be gathered and for which a date for setting inflation targeting could be discerned the object of the paper is to study the impact of it on actual inflation and inflation expectations we utilise intervention analysis to time series on inflation for a number of itl countries which have actually implemented it in doing so our main concern is to assess whether due to the it intervention there has been a significant change in the trend corresponding to these series and the extent to which inflation rates have actually been locked in at low levels after the implementation of it two major results emerge the first is that itl countries have been successful in locking in inflation rates the second is that non it countries have also been successful in terms of the lock in effect our overall conclusion then is that other factors in addition to it underpin the apparent success of the control of inflation

robust monetary policy structural breaks and nonlinearities in the reaction function of the central bank of brazil abstract in this work we seek to investigate the existence of nonlinearities in the reaction function of the central bank of brazil arising from this policymaker s uncertainties about the effects of the output gap on inflation theoretically we follow tillmann 2011 to obtain a nonlinear optimal monetary policy rule that is robust to uncertainty about the output inflation trade off of the phillips curve in addition we perform structural break tests to assess possible changes in the conduct of the brazilian monetary policy during the inflation targeting regime the results indicate that i the uncertainties about the slope in the phillips curve implied nonlinearities in the central bank of brazil s reaction function ii we cannot reject the hypothesis of a structural break in the monetary rule parameters occurring in the third quarter of 2003 iii there was an increase in the response of the selic rate to output gap and a weaker response to the current inflation gap in meirelles tombini s administration and iv the central bank of brazil has also reacted to the exchange rate in meirelles tombini s administration

what drives inflation expectations in brazil an empirical analysis this study examines the macro economic determinants of survey inflation expectations in brazil since the adoption of inflation targeting in 1999 the results suggest that the inflation targeting framework has helped anchor expectations with the dispersion of inflation expectations declining considerably particularly during periods of high uncertainty we also find that apart from the inflation target the stance of fiscal policy as proxied by the ratio of the consolidated primary surplus to gdp has been instrumental in shaping expectations the importance of past inflation in determining expectations appears to be relatively low and the overall empirical evidence does not suggest the presence of substantial inertia in the inflation process

an international housing market in the british isles evidence from business and medium term cycles using a friedman test it has been averred that there is an international market in housing inter alia adams z and fuss r 2010 macroeconomic determinants of international housing markets journal of housing economics

optimal monetary policy in a model of the credit channel we study a simple extension of the basic new keynesian set up in which we relax the assumption of frictionless financial markets due to asymmetric information and default risk bank lending rates incorporate a spread over the deposit rate we demonstrate that financial frictions affect aggregate dynamics mainly through their impact on firms financing costs which increase in both the deposit rate and in the spread between lending and deposit rates welfare includes a concern for smoothing these two financial market variables our numerical simulations suggest that an aggressive easing of policy is optimal in response to adverse financial market shocks

inflation targeting in latin america toward a monetary union this paper examines how monetary policy decisions in brazil regarding short term interest rates have affected the term structure of interest rates we apply an event study methodology in two distinct periods between january 2000 and august 2003 right after the implementation of the inflation targeting in brazil and between september 2003 and july 2008 the main results are 1 the surprise effects have decreased 2 the explanation power has increased in the second period indicating enhancement of monetary policy 3 market participants adjust their expectations with greater advance 4 the surprise effects of decisions on short term rates on the term structure of interest rates are now close to those found in the usa and germany but higher to those found in the uk and italy therefore the results indicate that fixed income market expectations are better adjusted to the central bank anti inflationary policy

monetary policy in the uk the authors argue that the institutional dimension of the bank of england monetary policy and the role the uk hm treasury assumes in this framework are both firmly based on the new consensus in macroeconomics ncm this is also the theoretical framework upon which the inflation targeting element of monetary policy is firmly based this paper discusses these aspects of uk monetary policy and then assesses the policy that has been pursued since 1997 with some reference made to the period between 1992 and 1997 when a version of the framework was introduced the strategy has been successful in terms of keeping uk inflation rates within the targets set by hm treasury however a number of problematic issues are highlighted and discussed

optimal monetary policy with an uncertain cost channel the cost channel of monetary transmission describes a supply side effect of interest rates on firms costs previous research has found this effect to vary both over time and across countries moreover the cyclical nature of financial frictions is likely to amplify the cost channel this paper derives optimal monetary policy in the presence of uncertainty about the true size of the cost channel in a min max approach the central bank derives an optimal policy plan to be implemented by a taylor rule it is shown that uncertainty about the cost channel leads to an attenuated interest rate setting behavior in this respect the brainard 1967 principle of cautious policy in the face of uncertainty continues to hold in both a bayesian and a min max framework

un conventional policy and the effective lower bound abstract we study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates we show that credit policy can be a powerful substitute for interest rate policy in the face of shocks that negatively affect bank monitoring efficiency unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero thus credit policy lowers the likelihood of hitting the zero bound constraint reductions in the policy rates without non standard measures are sub optimal as they force savers to inefficiently change their intertemporal consumption patterns

the impact of central bank independence on the performance of inflation targeting regimes abstract this paper examines the effects of inflation targeting on inflation in both advanced and emerging economies we do not detect significant effects in advanced economies and only find small benefits in emerging economies in line with previous studies however when we differentiate the impact of inflation targeting based on the degree of central bank independence we find large effects in emerging economies with low central bank independence our results therefore suggest that central bank independence is not a prerequisite for countries to experience significant declines in inflation following the adoption of inflation targeting furthermore we provide evidence that one channel through which inflation targeting lowers inflation more in countries with low central bank independence is the reduction of budget deficits following the adoption of an inflation target

how important is the credit channel an empirical study of the us banking crisis we examine whether by adding a credit channel to the standard new keynesian model we can account better for the behaviour of us macroeconomic data up to and including the banking crisis we use the method of indirect inference which evaluates statistically how far a model s simulated behaviour mimics the behaviour of the data we find that the model with credit dominates the standard model by a substantial margin credit shocks are the main contributor to the variation in the output gap during the crisis

optimal monetary policy with capital and a financial accelerator abstract whether there is a trade off between price and financial stability is an open question this paper characterises optimal monetary policy analytically in a new keynesian economy with capital and a financial accelerator in addition to stabilising inflation there is an incentive to smooth volatility in the net worth of borrowers and this presents a trade off for monetary policy this trade off can be eliminated if policymakers can additionally choose an optimal transfer to borrowers enriching the model with fire sales and countercyclical bankruptcy costs there is also an incentive to smooth volatility in default and the capital stock an optimal transfer to borrowers is not sufficient to eliminate the trade off in that case with fewer instruments than targets optimal transfers are state contingent and countercyclical while monetary policy stabilises inflation

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

aggregate and regional house price to earnings ratio dynamics in the uk this paper examines the time series properties of house price to earnings ratio hper in the uk using aggregate and regional data specifically we utilise a series of unit root tests to examine the null hypothesis of nonstationary hpers these include linear tests as well as a nonlinear test and also a test which accounts for abrupt structural change the results are against the notion of stationary hpers this implies that house prices may permanently diverge from earnings

how do us credit supply shocks propagate internationally a gvar approach abstract we study how us credit supply shocks are transmitted to other economies we use the recently developed gvar approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983 2009 we experiment with inter country links based on bilateral trade portfolio investment foreign direct investment and banking exposures capturing both bilateral trade and financial exposures in a gvar fits the data better than using trade weights only we use sign restrictions on the short run impulse responses in the us model to identify the credit supply shocks we find that negative credit supply shocks have strong negative effects on us and foreign gdp credit and equity markets in several countries respond clearly to the shocks exchange rate responses are consistent with a flight to quality to the us dollar the credit supply shocks explain about a fifth of one year ahead output forecast error variance in the us and about a tenth in the euro area and the uk but considerably less elsewhere

the persistence of inflation in the united states abstract has the persistence of inflation in the united states changed since 1965 we estimate the persistence of inflation over time using different measures and estimation procedures and we produce confidence intervals for our estimates as well as formal tests of unchanged persistence we find that inflation persistence has been high and approximately unchanged in the u s over our sample period we reconcile our results with other studies that reached different conclusions

inflation targeting fiscal rules and the policy mix cross effects and interactions we examine how inflation targeting it and fiscal rules fr affect inflation and fiscal performance in a large panel of countries during 1990 2009 in line with theory both fr and it appear to shape monetary and fiscal outcomes significant cross effects seem to exist as it strengthens fiscal performance whereas the combination of fr and it tends to be associated with more disciplined macroeconomic policies than if only one of these institutions operates our findings suggest that it and fr affect the coordination of the policy mix and point to potential benefits of reforming macroeconomic frameworks in a holistic fashion

does the dynamic time consistency model of inflation explain cross country differences in inflations dynamics dynamic time consistency models of monetary policy imply that the size of the inflationary response to price shocks and the persistence of inflation is inversely related to factors that enhance the central bank s ability to commit to low average inflation hence these models predict that the dynamics of inflation vary over time and across countries in response to changes in measures of political support for low inflation we find support for this hypothesis in data fromeighteen oecd countries over the period 1961 94 however political variables account for only a small fraction of the variation in inflation dynamics across countries 2004 elsevier ltd all rights reserved

inflation responses to commodity price shocks how and why do countries differ this paper relates the inflationary impact of commodity price shocks across countries to a broad range of structural characteristics and policy frameworks over the period 2001 2010 using several approaches the analysis suggests that economies with higher food shares in cpi baskets fuel intensities and pre existing inflation levels were more prone to experience sustained inflationary effects from commodity price shocks countries with more independent central banks and higher governance scores seem to have contained the impact of these shocks better the effect of the presence of inflation targeting regimes however appears modest and not evident during the 2008 food price shock the evidence suggests that trade openness financial development dollarization and labor market flexibility do not significantly influence the way in which domestic inflation responds to international commodity price shocks

to sign or not to sign on the response of prices to financial and uncertainty shocks abstract based on svar models identified by sign restrictions we estimate the macroeconomic effects of financial and uncertainty shocks in the euro area and the us paying particular attention to their impact on prices while our results confirm that such disturbances are important drivers of output fluctuations in both economies we find the shock responses of consumer prices to be ambiguous moreover restricting prices to co moving with output can considerably attenuate the measured impact of financial and uncertainty shocks on real activity

monetary policy and macroeconomic stability in latin america the cases of brazil chile colombia and mexico abstract in 1999 new monetary policy regimes were adopted in brazil chile colombia and mexico combining inflation targeting with floating exchange rates these regime changes have been accompanied by lower volatility in the monetary stance in brazil colombia and mexico despite higher inflation volatility in brazil and colombia this paper estimates a conventional new keynesian model for these four countries and shows that i the post 1999 regime has been associated with greater responsiveness by the monetary authority to changes in expected inflation in brazil and chile while in colombia and mexico monetary policy has become less counter cyclical ii lower interest rate volatility in the post 1999 period owes more to a benign economic environment than to a change in the policy setting and iii the change in the monetary regime has not yet resulted in a reduction in output volatility in these countries

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

search in the product market and the real business cycle empirical evidence suggests that most firms operate in imperfectly competitivemarkets we develop a search matching model between wholesalers and retailers firms face search costs and form long term relationships price bargain results in both wholesaler and retailer markups depending on firms relative bargaining power we simulate the model to explore the role of product market search frictions in business cycles we show that the way search costs are modelled is crucial to provide a realistic picture of firms business environment and improve the cyclical properties of an otherwise standard real business cycle model

inflation targeting matters evidence from oecd economies sacrifice ratios using data from oecd economies we show that inflation targeters suffered smaller output losses during disinflations when compared to nontargeters we also study why some countries choose to inflation target while others do not and find that higher average inflation and smaller debt levels render the adoption of the regime more likely applying heckman s procedure to control for selection bias does not alter the link between inflation targeting and less costly disinflations

inflation targeting and output inflation tradeoffs abstract this article assesses whether the adoption of inflation targeting it helps reduce the output inflation tradeoff we address the self selection problem of it policy adoption by the endogenous switching regressions and show that the output inflation tradeoffs are significantly lower in it countries not only over the whole sample but also across the developed and developing country subsamples in addition we also find strong evidence supporting the positive selection hypothesis i e countries have higher probability of adopting it are exactly those who benefit more larger reduction of output inflation tradeoff from the implementation of it additional results reveal that economies with higher trade openness lower financial openness and less flexible exchange rate regime are associated with larger tradeoff between output and inflation but the effects are only statistically significant in the it regime

inflation targeting genuine effects or publication selection bias abstract this paper uses a meta regression analysis mra to evaluate the impact of publication selection bias as for the macroeconomic effects of inflation targeting it a popular approach to implementing monetary policy documented in the existing literature using 8 059 point estimates from 113 studies we show that a significant part of the documented positive effects of it on inflation and to some extent output growth volatility is in fact due to publication selection bias in particular results pointing to lower inflation volatility and higher real gdp growth tend to be favored by researchers as well as those pointing to statistically significant macroeconomic effects however even after controlling for these two types of biases we find it to be correlated with lower inflation and higher real gdp growth differently the evidence on the it inflation volatility relationship is found to be less clear

inflation targeting in emerging economies panel evidence abstract this paper shows there is no evidence that the inflation targeting regime it improves economic performance as measured by the behavior of inflation and output growth in developing countries the control of common time effects results in less negative and less significant it impacts on inflation inflation volatility and output growth volatility than previously found in the literature additionally our analysis shows robust evidence of lower output growth during it adoption on balance although lower long run mean inflation signals that the central banks of emerging economies with inflation targeting are more inflation averse the costs of disinflation have not been lower than under other monetary regimes

optimal monetary policy with the cost channel in the standard new keynesian framework an optimizing policy maker does not face a trade off between stabilizing the inflation rate and stabilizing the gap between actual output and output under flexible prices an ad hoc exogenous cost push shock is typically added to the inflation equation to generate a meaningful policy problem in this paper we show that a cost push shock arises endogenously when a cost channel for monetary policy is introduced into the new keynesian model a cost channel is present when firms marginal cost depends directly on the nominal rate of interest besides providing empirical evidence for a cost channel we explore its implications for optimal monetary policy we show that its presence alters the optimal policy problem in important ways for example both the output gap and inflation are allowed to fluctuate in response to productivity and demand shocks under optimal monetary policy

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

international experiences with different monetary policy regimes any views expressed in this paper are those of the author only and not those of columbia university or the national bureau of economic research abstract this paper examines the international experiences with four basic types of monetary policy regimes 1 exchange rate targeting 2 monetary targeting 3 inflation targeting and 4 monetary policy with an implicit but not an explicit nominal anchor the basic theme that emerges from this analysis is that transparency and accountability are crucial to constraining discretionary monetary policy so that it produces desirable long run outcomes because the devil is in the details in achieving transparency and accountability what strategy will work best in a country depends on its political cultural and economic institutions as well as on its past history

asymmetric volatility transmission in international stock markets abstract the transmission mechanism of price and volatility spillovers across the new york tokyo and london stock markets is investigated the asymmetric impact of good news market advances and bad news market declines on volatility transmission is described by an extended multivariate exponential generalized autoregressive conditionally heteroskedastic egarch model using daily open to close returns we find strong evidence that volatility spillovers in a given market are much more pronounced when the news arriving from the last market to trade is bad a before and after october 1987 crash analysis reveals that the linkages and interactions among the three markets have increased substantially in the post crash era suggesting that national markets have grown more interdependent

inflation targeting should it be modeled as an instrument rule or a targeting rule abstract the paper discusses how current inflation targeting should be modeled and argues that it is better represented as a commitment to a targeting rule a rule specifying operational objectives for monetary policy or a condition for the target variables than as a commitment to a simple instrument rule like a taylor rule

the dynamic connectedness of uk regional property returns in this study we examine the network topology of uk regional property returns over the period 1973q4 2014q4 using a dynamic measure of connectedness developed by diebold and yilmaz 2014 overall

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

does inflation targeting really make a difference evaluating the treatment effect of inflation targeting in seven industrial countries abstract we evaluate the treatment effect of inflation targeting in seven industrial countries that adopted this policy in the 1990s to address the self selection problem of policy adoption we make use of a variety of propensity score matching methods recently developed in the treatment effect literature our results show that inflation targeting has no significant effects on either inflation or inflation variability in these seven countries further evidence from long term nominal interest rates and income velocity of money also supports the window dressing view of inflation targeting

the natural rate of interest and the financial cycle abstract i extend the model of laubach and williams 2003 by introducing an explicit role for the financial cycle in the joint estimation of the natural rates of interest unemployment and output and the sustainable growth rate of the us economy by incorporating the financial cycle arguably an omitted variable from the system the model is able to deliver more plausible estimates of business cycle dynamics the sustained decline in the natural rate of interest in recent decades is confirmed but i estimate that strong and persistent headwinds due to financial deleveraging have lowered temporarily the natural rate on average by around 1 p p below its long run trend over 2008 14 this may have impaired the effectiveness of interest rate cuts to stimulate the economy and lift inflation back to target in the immediate aftermath of the gfc

does inflation targeting make a difference in developing countries we evaluate the treatment effect of inflation targeting in thirteen developing countries that have adopted this policy by the end of 2004 using a variety of propensity score matching methods we show that on average inflation targeting has large and significant effects on lowering both inflation and inflation variability in these thirteen countries however the effectiveness of inflation targeting on lowering inflation is found to be quite heterogeneous the performance of a given inflation targeting regime can be affected by country characteristics such as government s fiscal position central bank s desire to limit the movements of exchange rate its willingness to meet the preconditions of policy adoption and the time length since the policy adoption

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

inflation targeting in brazil chile and mexico performance credibility and the exchange rate inflation targeting it has been adopted by a growing number of countries and latin america has been part of this world trend this paper reviews the recent it experiences of brazil chile and mexico applying a common empirical framework to the three country cases inflation performance under it and its associated output costs are reported and compared favorably to a control group of other countries the paper analyzes ways by which it has contributed to strengthen credibility the effect of targets on inflation expectations and on actual inflation the low influence of inflation shocks on core inflation and the decline in inflation forecast errors do the three inflation targeters exhibit fear of floating no considering their relatively large exchange rate volatility and moderate international reserve holdings no considering strongly declining inflation to devaluation passthrough coefficients and little evidence for monetary policy reaction to exchange rate shocks yes considering the frequency and intensity of sterilized exchange interventions in comparison to other inflation targeters that float more cleanly

obstacles to disinflation what is the role of fiscal expectations persistently high expected inflation often makes it difficult for policy makers to recover from inflationary episodes without substantial output losses using survey data from eleven disinflation episodes we can assess whether the more or less sluggish decline of inflation rates towards lower target levels is related to backward looking pricing behavior or to imperfect credibility of the stabilization efforts we find that expectations of future inflation play a much more important role than past inflation in shaping the inflation process second we find that an improvement in various measures of fiscal balances significantly reduces inflation expectations this evidence suggests that when attempting to stabilize inflation priority should be given to building fiscal credibility oya celasun r gaston gelos and alessandro prati

does self fulfilment of the inflation expectation exist abstractthis study examines the causal relationship between the actual and expected inflation in the u s using the bootstrap granger full sample causality test and sub sample rolling window estimation test to illustrate the self fulfilment of inflation expectations the full sample result indicates that there is a bidirectional causality between the actual and expected inflation showing the possibility of self fulfilment of inflation expectations which illustrates that inflation is driven by inflation expectation however considering structural changes in two series we find that the short run causal nexus between the actual and expected inflation using full sample data are fraudulent by adopting a time varying rolling window approach to revisiting the dynamic causal relationships this article identifies that the actual inflation has both positive and negative impacts on the expected inflation in distinct sub periods nevertheless inflation expectation exerts only negative effects on the actual inf

inflation targeting makes the difference novel evidence on inflation stabilization abstract though svensson 1997 svensson 2003 provides theoretical evidence that the introduction of inflation targeting is consistent with an inflation stabilizing monetary policy empirical evidence that the introduction of inflation targeting actually changes central bank s behavior is still missing this paper aims to close this gap and estimates forward looking monetary policy rules for 20 inflation targeting countries to this end we use a data set which is available to the central bank in real time published on a frequently basis comparable among all countries and which includes the periods before and after the introduction of inflation targeting we find that the introduction of inflation targeting significantly shifts the central bank s reaction function toward inflation stabilizing we also provide evidence of time varying effects and find that central banks stabilize inflation once inflation targeting is introduced we take our results as strong evidence that the introduction of inflation targeting makes the difference for monetary policy strategies

inflation inflation uncertainty and relative price variability this paper tests three models that predict a relationship between the variability of relative price changes rpv and aspects of inflation such as expected inflation unexpected inflation and inflation uncertainty these are respectively the menu costs model the lucas barro signal extraction model and the hercowitz cukierman extension of the lucas barro model that allows for different price elasticities of supply across markets the results imply rejection of the hypothesis that any one of the models entirely explains the relationship between inflation and rpv and also imply rejection of the hypothesis that the three models together jointly explain the relationship

optimal monetary policy in a model with agency costs this paper integrates a fully explicit model of agency costs into an otherwise standard dynamic new keynesian model in a particularly transparent way a principal result is the characterization of agency costs as endogenous markup shocks in an output gap version of the phillips curve the model s utility based welfare criterion is derived explicitly and includes a measure of credit market tightness that we interpret as a risk premium the paper also fully characterizes optimal monetary policy and provides conditions under which zero inflation is the optimal policy finally optimal policy can be expressed as an inflation targeting criterion that depending upon parameter values can be either forward or backward looking

testing the transparency benefits of inflation targeting evidence from private sector forecasts abstract using inflation forecast data for 11 it adoption countries it adoption is found to promote convergence in forecast errors suggesting that it enhances transparency this result which is subjected to several robustness checks and found to be robust supports morris and shin s 2002 contention that better public information is most beneficial for forecasters with bad private information however it does not support their hypothesis that better public information could make private forecasts less accurate

taylor rules and exchange rate predictability in emerging economies abstract this study demonstrates the relationship between exchange rate determination and an endogenous monetary policy represented by taylor rules we fill a gap in the literature by focusing on a group of fifteen emerging economies that adopted free floating exchange rates and inflation targeting beginning in the mid 1990s because of the limited span of the time series which is a common obstacle to studying emerging economies we employ panel data regressions to produce more efficient estimates following the recent literature we use a robust set of out of sample statistics incorporating bootstrapped and asymptotic distributions for the diebold mariano statistic the clark and west statistic and theil s u ratio by evaluating different specifications for the taylor rule exchange rate model based on their out of sample performances we find that a present value forward looking specification shows strong evidence of exchange rate predictability

monetary and macroprudential policies in a leveraged economy we examine the optimal monetary policy in the presence of endogenous feedback loops between asset prices and economic activity when macroprudential policies can also be pursued absent macroprudential policies the optimal monetary policy leans against asset prices and can be closely approximated using a speed limit rule that responds to the growth of financial variables an endogenous feedback loop is crucial for this result price stability is otherwise quasi optimal similarly a simple macroprudential rule that links reserve requirements to credit growth dampens the endogenous feedback loop and leads to near price stability state contingent taxes on lending are shown to be welfare improving

the mirage of exchange rate regimes for emerging market countries this paper argues that much of the debate on choosing an exchange rate regime misses the boat it begins by discussing the standard theory of choice between exchange rate regimes and then explores the weaknesses in this theory especially when it is applied to emerging market economies it then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits the conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal financial and monetary institutions in producing macroeconomic success in emerging market countries this suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable and more on these deeper institutional arrangements a focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years

robustness of the estimates of the hybrid new keynesian phillips curve abstract gali and gertler 1999 inflation dynamics a structural econometric approach journal of monetary eonomics 44 2 195 222 developed a hybrid variant of the new keynesian phillips curve that relates inflation to real marginal cost expected future inflation and lagged inflation gmm estimates of the model suggest that forward looking behavior is dominant the coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation while the latter differs significantly from zero it is quantitatively modest several authors have suggested that our results are the product of specification bias or suspect estimation methods here we show that these claims are incorrect and that our results are robust to a variety of estimation procedures including gmm estimation of the closed form and nonlinear instrumental variables also as we discuss many others have obtained very similar results to ours using a systems approach including fiml techniques hence the conclusions of gg and others regarding the importance of forward looking behavior remain robust

making the most of high inflation this article examines the relationship between the real effects of inflation and its level in countries with frequent episodes of high inflation the real effects are computed as asymmetric impulse responses of output to inflation separately in the regimes with different signs of the differences between the expected inflation and the predicted output neutral inflation it is found that with the increase in inflation such effects increase in the regime with the positive sign relatively to the effects in the regime with the negative sign it is also shown that this finding is valid for most countries with high inflation episodes where inflation is greater than 4 8 for at least 25 of quarterly observations this leads to a simple policy prescription that in economies with frequent high inflation episodes anti inflationary monetary decisions are least damaging for output if undertaken in the periods when the difference between the expected and output neutral inflation is negative

testing for persistence in housing price to income and price to rent ratios in 16 oecd countries housing price to income and price to rent ratios are among the most widely monitored indicators of housing market conditions while these ratios tend to fluctuate around a constant level or a mild trend over the long term they also tend to deviate from these benchmarks for protracted periods traditional unit root tests often indicate the presence of a unit root this article uses the framework of fractional integration to test the persistence of price to income and price to rent ratios in a sample of 16 oecd countries spanning four decades the results indicate that the ratios are highly persistent the possibility that persistence estimates may be affected by structural breaks in the series is also considered but evidence of such breaks is found only in a very limited number of cases policy action may be required if high price to income and price to rent ratios have adverse social and economic consequences policies should be guided by a careful analysis of the factors behind high ratios

banking competition collateral constraints and optimal monetary policy we analyze optimal monetary policy in a model with two distinct financial frictions monopolistically competitive banks that charge endogenous lending spreads and collateral constraints we show that welfare maximization is equivalent to stabilization of four goals inflation output gap the consumption gap between borrowers and savers and a housing gap that measures the distortion in the distribution of the collateralizable asset between both groups collateral constraints create a trade off between stabilization goals following both productivity and financial shocks and relative to strict inflation targeting the optimal policy implies sharper movements in the policy rate aimed primarily at reducing fluctuations in asset prices and hence in borrowers net worth the policy trade offs become amplified as banking competition increases due to the fall in lending spreads and the resulting increase in borrowers leverage

reaching inflation stability inflation volatility has significantly declined over the last 20 years in the u s to find out why i follow a structural approach i estimate a complete new keynesian model which imposes cross equation restrictions on the time series of inflation the output gap and the interest rate i perform counterfactual analysis with two commonly used measures of inflation consumer price index cpi and gross domestic product deflator gdpd while the change in the propagation mechanism of the economy induced most of the cpi volatility drop it played a smaller role in the reduction of gdpd volatility our maximum likelihood estimates imply that the most important factor behind the drop in inflation volatility was the more forward looking price setting behavior of the 1980s and 1990s