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on Central Banking |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | The neo-Fisher effect and the central bank information (CBI) effect produce similar outcomes: under both, a monetary tightening triggers an increase in inflation and an expansion in real activity. Separate estimates of these effects run the risk of confounding one with the other. To disentangle these two channels, we introduce into a new-Keynesian model a permanent monetary shock that generates neo-Fisher effects and an aggregate demand shock to which the central bank responds that creates CBI effects. We estimate the model on U.S. data. We find that the neo-Fisherian shock is an important driver of inflation, while the CBI shock explains a significant fraction of movements in the nominal interest rate. The CBI shock explains little of inflation and output, but, through counterfactual exercises, we establish that this reflects the central bank's success in isolating the economy from aggregate demand disturbances. These results are shown to hold under full and imperfect information. |
| JEL: | E3 E5 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33136 |
| By: | Kekaye, Tsholofelo; Bonga-Bonga, Lumengo |
| Abstract: | This study expands on the existing literature by investigating the impact of Inflation Targeting (IT) policies on the duration of High Inflation Episodes (HIEs) in both developed and emerging economies. Utilizing Survival Analysis, the study evaluated HIEs' lengths before and after IT policy implementation across 26 countries from 2003 to 2023. The findings reveal that IT policies significantly reduce the duration of HIEs. Kaplan-Meier estimates indicate a clear decline in ongoing HIE probability over time, with a more pronounced reduction in emerging economies. Statistical tests like the Log-Rank and Wilcoxon tests provide robust evidence supporting the effectiveness of IT policies, showing significant differences in HIE durations pre- and post-IT implementation. This study also addresses the literature gap by distinguishing the differential effects of IT policies based on the developmental status of countries, demonstrating their efficacy in enhancing price stability across diverse economic contexts. |
| Keywords: | monetary policy; inflation targeting; survival analysis |
| JEL: | C5 E52 E58 |
| Date: | 2024–11–22 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122745 |
| By: | Xuning Ding; Zhengyang Jiang |
| Abstract: | Monetary and fiscal policies require coordination to achieve desired macroeconomic outcomes. The literature since Leeper (1991) has focused on two regimes: monetary dominance and fiscal dominance. In both cases, one policy is active while the other is passive and accommodates the former. We study this coordination problem in an international economy, and find a third regime—hegemon dominance. In this case, one country (the hegemon)'s monetary and fiscal authorities can pursue separate policy goals, while the other country's monetary and fiscal policies are both accommodative. For example, the hegemon can pursue a monetary policy unbacked by its fiscal policy. When this happens, the foreign monetary authority has to take the same stance as the hegemon, the foreign fiscal authority has to provide fiscal backing for the monetary stance undertaken by both countries, and the exchange rate adjusts to equilibrate the economy. Our result suggests that the U.S. fiscal policy's independence from its own monetary policy can be made possible by accommodative foreign policies, and that the Fed's effort to fight inflation can succeed despite the high level of public debt which would have required enormous fiscal backing in a closed economy. |
| JEL: | E52 E63 F33 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33123 |
| By: | Jongrim Ha; Dohan Kim; M. Ayhan Kose; Eswar S. Prasad |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| JEL: | E31 E32 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33133 |
| By: | Christopher M. Meissner; Kensuke Molnar-Tanaka |
| Abstract: | Over the last 200 years, economies have accumulated significant experience in managing capital flows in the face of globalization. This study examines management of capital flows since the 1800s with an eye towards providing historical lessons for Southeast Asia today. We start with the global sterling/gold standard regime of the late 19th century globalization and then discuss the tumultuous inter-war period. We then examine policies in Southeast Asian countries since the 1950s. In the 1980s and 1990s, many economies faced increasing financial instability related to the resumption of global capital flows, most noticeably in Southeast Asia during the Asian Financial Crisis. The paper examines the historical importance of exchange rate policies for capital flow stability. Capital flow management in the 21st century faces various challenges such as enhanced state-intervention and digital currencies. |
| JEL: | F21 F33 F36 N20 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33145 |