|
on Central Banking |
| By: | René Lalonde |
| Abstract: | The linkages between inflation and the economy's cyclical position are thought to be strongly affected by the credibility of monetary authorities. The author complements existing research by estimating a small forward-looking model of the U.S. economy with endogenous central bank credibility. His work differs from the existing literature in several ways. First, he endogenizes and estimates credibility parameters, allowing inflation expectations to be a mix of backward- and forward-looking agents. Second, his models include both outcome- and action-based credibility. Third, he estimates a non-linear relation between policy credibility and divergences of inflation from target, which is also assumed to change over history. Finally, the author's non-linear time-varying credibility indexes do not rely on a two-regime definition, but on a continuum of credibility regimes. The author finds strong, stable, and statistically significant outcome- and action-credibility effects that generate important inflation inertia. According to his results, the value of the endogenous credibility indexes has risen steadily across the different monetary policy regimes. |
| Keywords: | Transmission of monetary policy; Econometric and statistical methods; Inflation and prices |
| JEL: | E52 C32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-16&r=cba |
| By: | Klaus Adam (CEPR, London, European Central Bank); Roberto M. Billi (Center for Financial Studies) |
| Abstract: | We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. mark-up shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not require targeting a positive average rate of inflation. Interestingly, the presence of binding real rate shocks alters the policy response to (non-binding) mark-up shocks. |
| Keywords: | nonlinear optimal policy, zero interest rate bound, commitment, liquidity trap, New Keynesian |
| JEL: | C63 E31 E52 |
| Date: | 2004–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200413&r=cba |
| By: | Markus Haas (University of Munich); Stefan Mittnik (University of Munich); Bruce Mizrach (Rutgers University) |
| Abstract: | Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulatedmoments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. In an application to the 1992-93 European Exchange Rate Mechanism crises, that both the options and the underlying exchange rates provide useful information for policy makers. |
| Keywords: | Options; Implied Probability Densities; GARCH; Fat-tails; Exchange Rate Mechanism |
| JEL: | G12 G14 F31 |
| Date: | 2005–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200509&r=cba |
| By: | Joreg Bibow (The Levy Economics Institute) |
| Abstract: | Challenging the conventional wisdom that structural problems are to blame for the euro area’s 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 targeter—and 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 ECB’s failure to internalize the euro area’s fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future. |
| Keywords: | Monetary policy, European Central Bank, inflation targeting, inflation persistence, tax-push inflation, antigrowth bias. |
| JEL: | E31 E42 E58 E61 |
| Date: | 2005–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0507017&r=cba |
| By: | Klaus Adam (CEPR, London, University of Frankfurt); George W. Evans (University of Oregon, United States); Seppo Honkapohja (Cambridge University, United Kingdom) |
| Abstract: | Earlier studies of the seigniorage inflation model have found that the high-inflation steady state is not stable under adaptive learning. We reconsider this issue and analyze the full set of solutions for the linearized model. Our main focus is on stationary hyperinflationary paths near the high-inflation steady state. The hyperinflationary paths are stable under learning if agents can utilize contemporaneous data. However, in an economy populated by a mixture of agents, some of whom only have access to lagged data, stable inflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high. |
| Keywords: | Indeterminacy, inflation, stability of equilibria, seigniorage |
| JEL: | C62 D83 D84 E31 |
| Date: | 2004–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200415&r=cba |
| By: | Filippo Altissimo; Pierpaolo Benigno; Diego Rodriguez Palenzuela |
| Abstract: | This paper analyzes the long-run determinants of inflation differentials in a monetary union. First, we aim at establishing some stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU's harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analyzed. Our model departs in several respect from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level. |
| JEL: | E31 F41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11473&r=cba |
| By: | Robert G. King (Boston University); Alexander L. Wolman (Federal Reserve Bank of Richmond) |
| Abstract: | In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy responds. |
| Keywords: | Monetary Policy, Discretion, Time-Consistency, Multiple Equilibria, Complementarity |
| JEL: | E5 E61 D78 |
| Date: | 2004–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200422&r=cba |