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on Central Banking |
| By: | Sarno, Lucio; Thornton, Daniel L; Valente, Giorgio |
| Abstract: | We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target; (iii) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a natural interpretation and clear policy implications. |
| Keywords: | E47; federal fund rate; forecasting; nonlinearity; term structure |
| JEL: | E43 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4587&r=cba |
| By: | Adam, Klaus |
| Abstract: | This Paper studies optimal nominal demand policy in a flexible price economy with monopolistic competition and inattentive firms (Shannon). Inattentiveness gives rise to idiosyncratic information errors and imperfect common knowledge about the shocks hitting the economy. Strategic complementarities in the price-setting game between firms then strongly amplify the effects of information frictions and the real effects of monetary policy. Therefore, strategic complementarities make it optimal to stabilize the output gap by nominally accommodating shocks to firms’ desired mark-up. As mark-up shocks become more persistent, however, optimal policy is again increasingly characterized by price level stabilization. Shocks to the natural rate of output are found not to generate a policy trade-off. |
| Keywords: | information imperfections; nominal demand management; Private information; rational inattention; Shannon capacity |
| JEL: | D82 E31 E52 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4594&r=cba |
| By: | Eijffinger, Sylvester C W; Governatori, Matteo |
| Abstract: | The Paper builds a simplified model describing the economy of a currency union with decentralized national fiscal policy, where the main features characterizing the policy-making are similar to those in EMU. National governments choose the size of deficit taking into account the two main rules of the Stability and Growth Pact on public finance. Unlike previous literature the asymmetric working of those rules is explicitly modeled in order to identify its impact on the Nash equilibrium of deficits arising from a game of strategic interaction between fiscal authorities in the union. |
| Keywords: | asymmetric fiscal rules; decentralized fiscal policy; EMU; stability and growth pact |
| JEL: | E61 H30 H60 H70 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4647&r=cba |
| By: | Schmitt-Grohé, Stephanie; Uribe, Martin |
| Abstract: | This Paper identifies optimal interest-rate rules within a rich, dynamic, general equilibrium model that has been shown to account well for observed aggregate dynamics in the post-war United States. We perform policy evaluations based on second-order accurate approximations to conditional and unconditional expected welfare. We require that interest-rate rules be operational, in the sense that they include as arguments only a few readily observable macroeconomic indicators and respect the zero bound on nominal interest rates. We find that the optimal operational monetary policy is a real-interest-rate targeting rule. That is, an interest-rate feedback rule featuring a unit inflation coefficient, a mute response to output, and no interest-rate smoothing. Contrary to existing studies, we find a significant degree of optimal inflation volatility. A key factor driving this result is the assumption of indexation to past inflation. Under indexation to long-run inflation the optimal inflation volatility is close to zero. Finally, we show that initial conditions matter for welfare rankings of policies. |
| Keywords: | business cycles; inflation stabilization; monetary policy evaluation |
| JEL: | E52 E61 E63 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4654&r=cba |
| By: | Bayoumi, Tamim; Sgherri, Silvia |
| Abstract: | Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary policy uncertainty helps determine the sluggish adjustment of expectations to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in US monetary policy and the Phillips curve, we find strong evidence that this link exists. These results question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the US and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply-side of the economy. |
| Keywords: | inflation dynamics; Kalman filter; monetary policy |
| JEL: | C51 E31 E52 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4696&r=cba |
| By: | Ellison, Martin; Sarno, Lucio; Vilmunen, Jouko |
| Abstract: | We examine optimal policy in a two-country model with uncertainty and learning, where monetary policy actions affect the real economy through the real exchange rate channel. Our results show that whether policy should be cautious or activist depends on the size of one country relative to another. If one country is small relative to the other then activism is optimal. In contrast, if the two countries are equal sized then caution prevails. Caution is induced in the latter case because of the interaction between the home and foreign central banks. In a two-country symmetric equilibrium, learning is shown to be detrimental to welfare, implying that optimal policy is cautious. |
| Keywords: | learning; monetary policy; open economy |
| JEL: | E52 E58 F41 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4766&r=cba |
| By: | Seok-Kyun Hur |
| Abstract: | Our paper explores a transmission mechanism of monetary policy through bond market. Based on the assumption of delayed responses of economic agents to monetary shocks, we derive a system of equations relating the term structure of interest rates with the past history of money growth rates and test the equations with the US data. Our results confirm that the higher ordered moments of money growth rate(converted from the past history of money growth rates) influence the yields of bonds with various maturities in different timing as well as in different magnitudes and monetary policy targeting a certain shape of the term structure of interest rates could be implemented with certain time lags due to path-dependency of interest rates. |
| JEL: | E43 E44 E52 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11102&r=cba |
| By: | Tim Robinson; Andrew Stone |
| Abstract: | We use a simple model of a closed economy to study the recommendations of monetary policy-makers, attempting to respond optimally to an asset-price bubble whose stochastic properties they understand. We focus on the impact which the zero lower bound (ZLB) on nominal interest rates has on the recommendations of such policy-makers. For a given target inflation rate, we identify several different forms of `insurance' which policy-makers could potentially take out against encountering the ZLB due to the future bursting of a bubble. Even with perfect knowledge of the bubble process, however, which of these will be optimal varies from one type of bubble to another and, for certain bubbles, from one period to the next. It is therefore difficult to say whether the ZLB should cause policy-makers to operate policy more tightly or loosely than they would otherwise do, while a bubble is growing -- even after abstracting from the informational difficulties they face in practice. We also examine the implications of the ZLB for policy-makers' preferences as to their inflation target. Policy-makers who wish to avoid concerns about the ZLB should take care not to set too low a target -- especially if the neutral real interest rate is low. |
| JEL: | E32 E52 E60 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11105&r=cba |