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on Central Banking |
| By: | Mitsuru Iwamara; Takeshi Kudo; Tsutomu Watanabe |
| Abstract: | We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999%u20142004. First, we find that the Bank of Japan%u2019s policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history dependence, a key feature of the optimal monetary policy rule. Second, the term structure of the interest rate gap (the spread between the actual real interest rate and its natural rate counterpart) was not downward sloping, indicating that the Bank of Japan%u2019s commitment failed to have su.cient influence on the market%u2019s expectations about the future course of monetary policy. Third, we find that the primary surplus in 1999%u20142002 was higher than predicted by the historical regularity, implying that the Japanese government deviated from the Ricardian rule toward fiscal tightening. These findings suggest that inappropriate conduct of monetary and fiscal policy during this period delayed the timing to escape from the liquidity trap. |
| JEL: | E31 E52 E58 E61 E62 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11151&r=cba |
| By: | di Giovanni, Julian (IMF); McCrary, Justin (University of Michigan); von Wachter, Till (Columbia University and IZA Bonn) |
| Abstract: | Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We compare this identification strategy to the vector autoregression approach, and give an interpretation of our estimates that is appropriate in a dynamic context. Moreover, we show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany. |
| Keywords: | monetary policy, forward looking bias, instrumental variables |
| JEL: | E52 J60 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1495&r=cba |
| By: | Yunus Aksoy (School of Economics, Mathematics & Statistics, Birkbeck College); Tomasz Piskorski |
| Abstract: | Recent empirical research documents that the strong short-term relationship between U.S. monetary aggregates on one side and inflation and real output on the other has mostly disappeared since the early 1980s. Using the direct estimate of flows of USD abroad we find that domestic money (currency corrected for the foreign holdings of dollars) contains valuable information about future movements of U.S. inflation and real output. Statistical evidence suggests that the Friedman-Schwartz stylized facts can be reestablished once the focus of analysis is back on the correct measure of domestic monetary aggregates. |
| Keywords: | foreign holdings, domestic money, monetary aggregates, information value |
| JEL: | E3 E4 E5 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0506&r=cba |