|
on Central Banking |
| By: | Lars Svensson; Noah Williams |
| Abstract: | We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables. The form of model uncertainty our framework encompasses includes: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts---fan charts---of target variables and instruments. Our methods hence extend certainty equivalence and "mean forecast targeting" to more general certainty non-equivalence and "distribution forecast targeting." |
| JEL: | E42 E52 E58 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11733&r=cba |
| By: | Arnab Bhattacharjee; Christoph Thoenissen |
| Abstract: | We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric measures of the distance between model and data variance-covariance matrices to compare the different models. We find that the models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data. |
| Keywords: | Intertemporal macroeconomics, role of money, monetary policy, model selection, moment matching. |
| JEL: | C13 E32 E52 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0511&r=cba |
| By: | Matteo Ciccarelli (Corresponding author: European Central Bank, DG Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Benoît Mojon (Université de la Méditerranée and European Central Bank, DG Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper shows that inflation in industrialized countries is largely a global phenomenon. First, inflations of (22) OECD countries have a common factor that alone account for nearly 70% of their variance. This large variance share that is associated to Global Inflation is not only due to the trend components of inflation (up from 1960 to 1980 and down thereafter) but also to fluctuations at business cycle frequencies. Second, Global Inflation is, consistently with standard models of inflation, a function of real developments at short horizons and monetary developments at longer horizons. Third, there is a very robust "error correction mechanism" that brings national inflation rates back to Global Inflation. This model consistently beats the previous benchmarks used to forecast inflation 1 to 8 quarters ahead across samples and countries. |
| Keywords: | Inflation; common factor; international business cycle; OECD countries. |
| JEL: | E31 E37 F42 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050537&r=cba |
| By: | Kenneth Lewis (Department of Economics,University of Delaware); Laurence Seidman |
| Abstract: | This paper provides a quantitative assessment of the use of fiscal stimulus to achieve full recovery from a severe recession when the potency of monetary policy weakens after hitting its zero interest-rate bound. By contrast, most of the numerous recent zero interest-rate bound papers have ignored the use of fiscal stimulus, preferring to examine whether monetary policy alone can revive the economy despite the zero bound. We obtain our estimates by adapting and simulating a macro-econometric model that has been recently econometrically estimated, updated, and statistically tested using U.S. times series data. By contrast, most of the recent zero bound papers do not use an econometrically-estimated model. If the U.S. economy were hit with a large negative demand shock that drives the unemployment rate up to 7.9%, we estimate that even aggressive monetary policy that drives long-term interest rates to near zero would reduce the unemployment rate only to 6.7%. Full recovery would be achieved, however, if the aggressive monetary policy were complemented by sufficient fiscal stimulus in the form of cash transfers or income tax cuts to households. We estimate that a quarterly transfer to households that peaks at 2.7% of quarterly GDP and phases out gradually as it is repeated over seven quarters (so that the cumulative transfer is roughly 12% of quarterly GDP) would reduce the unemployment rate in such a recession by nearly an additional percentage pointC from 6.7% to 5.9%. |
| JEL: | E62 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:05-19&r=cba |
| By: | William Barnett (University of Kansas); Apostolos Serletis (University of Calgary); W. Erwin Diewert (University of British Columbia) |
| Abstract: | This is the front matter from the book, William A. Barnett and Apostolos Serletis (eds.), The Theory of Monetary Aggregation, published in 2000 by Elsevier in its Contributions to Economic Anaysis mongraph series. The front matter includes the Table of Contents and the Introduction by Barnett and Serletis and the Preface by W. Erwin Diewert. The volume contains a unified collection and discussion of W. A. Barnett's most important published papers on financial aggregation theory and monetary economics. |
| Keywords: | monetary aggregation, money demand, Divisia, Divisia monetary aggregates, index number theory, aggregation theory |
| JEL: | E41 G12 C43 C22 |
| Date: | 2005–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511008&r=cba |
| By: | Andreas Schabert (University of Amsterdam, Department of Economics, Roeterstraat 11, 1018 WB Amsterdam,The Netherlands.) |
| Abstract: | This paper examines monetary policy implementation in a ticky price model. The central bank’s plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money injections. These equilibria are associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation is found to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank’s plan can uniquely be implemented in a history dependent way by money injections, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity. |
| Keywords: | Monetary policy implementation; optimal discretionary policy; history dependence; equilibrium indeterminacy; money growth policy. |
| JEL: | E52 E51 E32 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050533&r=cba |
| By: | Hilde C. Bjørnland (Department of Economics, University of Oslo and Norges Bank (Central Bank of Norway)) |
| Abstract: | Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts” to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP. |
| Keywords: | Dornbusch overshooting, VAR, monetary policy, exchange rate puzzle, identification |
| JEL: | C32 E52 F31 F41 |
| Date: | 2005–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2005_11&r=cba |
| By: | Joerg Bibow |
| Abstract: | This paper provides an overview of central banking arrangements in those European countries that have adopted the euro. Issues addressed include the structure of the ÒEurosystemÓ and its central banking functions, the kind of independence granted to the system and the role of monetary policy that central bankers have adopted for themselves, the Òtwo-pillar policy framework,Ó operating procedures, and actual performance since the euroÕs launch in 1999. The analysis concludes that, given the current macroeconomic policy regime, trends, and practices, the euro is on track for failure. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_428&r=cba |
| By: | Joerg Bibow |
| Abstract: | Challenging the conventional wisdom that structural problems are to blame for the euro areaÕs protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeterÑand a rather soft one, too -- it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. Curiously, this asymmetry has not only given rise to an antigrowth bias, but to upward price pressures and distortions as well. There is a link between stagnation and inflation persistence that owes to the ECBÕs failure to internalize the euro areaÕs fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_425&r=cba |
| By: | G J Bratsiotis |
| Abstract: | Using a general equilibrium model this paper shows that when large monopolistic firms or unions perceive even a small influence on aggregate nominal variables, price targeting results in a higher equilibrium output than monetary accommodation. This is because price targeting increases, whereas monetary accommodation decreases, (i) the price elasticity of demand, (ii) the labour elasticity of demand and (iii) the elasticity of the wage with respect to households’ total real income (i.e. wage, money transfers and profits). Within this framework, price targeting is shown to reduce the macroeconomic inefficiencies associated with monopolistic competition. The paper also shows that the standard approximation, that no single price or wage setter can affect nominal aggregates, is a good approximation provided, (a) at least a few hundreds of such large firms exist and more significantly (b) labour markets are decentralized or wage centralization is very low. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:63&r=cba |