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on Central Banking |
| By: | Stephen D. Williamson |
| Keywords: | monetary policy, monetary theory, Friedman rule, money neutrality |
| JEL: | E4 E5 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:379&r=cba |
| By: | Juha Seppala; Federico Ravenna |
| Keywords: | Term Structure of Interest Rates, Monetary Policy, Sticky Prices, Habit Formation, Expectations Hypothesis |
| JEL: | E43 E5 G12 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:804&r=cba |
| By: | Christopher Waller; Aleksander Berentsen (Economics University of Basel) |
| Keywords: | Financial Intermediation, Aggregate Shocks, Monetary Policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:416&r=cba |
| By: | Felipe F. Schwartzman |
| Abstract: | In a simple new keyenesian model of monetary policy under discretion constraining the Central Bank to put inflation within a pre-specified Inflation Target Zone can eliminate the inflation bias and, at least for certain parameter ranges, significantly reduce the stabilization bias. Also, it is possible to investigate what is the optimal Inflation Target Zone for different economies. These seem to depend of the structural parameters in a non-linear and often non-monotonic way. |
| JEL: | E42 E52 E61 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:038&r=cba |
| By: | Henry Siu |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:821&r=cba |
| By: | Juan Pablo Medina; Ruy Lama |
| Keywords: | Optimal monetary policy; Asset market segmentation; Sticky prices. |
| JEL: | E44 E52 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:774&r=cba |
| By: | Michael R. Pakko; William T. Gavin (Research Federal Reserve Bank of St. Louis); Finn E. Kydland |
| Keywords: | Inflation, Taxation, Business Cycle |
| JEL: | E31 E32 E42 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:265&r=cba |
| By: | Julen Esteban-Pretel (Economics University of Tokyo); Elisa Faraglia |
| Keywords: | Search and Matching, Loss of Skill, Business Cycles, Monetary Policy |
| JEL: | J41 J31 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:328&r=cba |
| By: | Bjørnland, Hilde C. (Dept. of Economics, University of Oslo) |
| 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: | 2005–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_026&r=cba |
| By: | Stefano Eusepi; Jess Benhabib |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:926&r=cba |
| By: | Andrew T. Levin (Federal Reserve Board,Washington, DC 20551 USA); Richhild Moessner (Bank for International Settlements, Basel, Switzerland) |
| Abstract: | How monetary policy should be set optimally when the structure of the economy exhibits inflation persistence is an important question for policy makers. This paper provides an overview of the implications of inflation persistence for the design of monetary policy. |
| Keywords: | Inflation persistence; optimal monetary policy; uncertainty. |
| JEL: | E52 E58 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050539&r=cba |
| By: | Márcio Holland |
| Abstract: | After strong currency crisis, in January 1999, Brazil implemented flexible exchange rate regime combined with inflation targeting. Some economists believe that emerging markets do not allow the exchange rate to float as much they had announced and therefore they suffer from the fear of floating. However, in this article there is evidence to believe that central banks in the emerging markets care about inflation ratter than exchange rate. The remarkable result found in this article is that the aggressiveness of the interest rate reaction to inflation explains far more the current monetary and exchange rate policy in Brazil than the idea of the fear of floating. |
| JEL: | E31 E37 E52 C22 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:032&r=cba |
| By: | Carlo Rosa; Giovanni Verga |
| Abstract: | This paper analyses the ECB communication, focusing in particular on its transparencydimension. We posit that if the ECB is transparent about its future policy decisions, then weshould be able to forecast fairly well its future interest rate setting behaviour. We find thatthe predicting ability of the European monetary authority's words, is similar to the oneimplied by market-based measures of monetary policy expectations. Moreover, the ECB'swording provides complementary, rather than substitute, information with respect toeconomic and monetary variables. |
| Keywords: | ECB communication, transparency, monetary policy forecast, empirical reactionfunction, Euribor rate curve |
| JEL: | E43 E52 E58 G14 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0694&r=cba |
| By: | Sharon Kozicki; P.A. Tinsley |
| Abstract: | This paper uses real-time briefing forecasts prepared for the Federal Open Market Committee (FOMC) to provide estimates of historical changes in the design of US monetary policy and in the implied central bank target for inflation. Empirical results and FOMC transcripts support a neglected interpretation of policy during the Great Inflation of the 1970’s. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-04&r=cba |
| By: | Linda S. Goldberg; Michael W. Klein |
| Abstract: | The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro-area, and on the euro/dollar exchange rate, suggest that the market's perception of the policy stance of the ECB during its first six years of operation significantly evolved, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the United States yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve. |
| JEL: | F3 E5 E6 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11792&r=cba |
| By: | Helder Ferreira de Mendonça |
| Abstract: | The main objective of this paper is to analyze if the adoption of inflation targeting implies changes in the behavior of several macroeconomic variables, especially in the unemployment rate. For this, empirical evidences based on a set of fourteen countries that adopted explicit inflation targeting are shown. Furthermore, a particular analysis for the Brazilian case through a VAR that considers the following variables: unemployment rate, Selic, inflation, industrial production, and inflation targeting credibility, is made. Among several findings taken from international experience, it is observed that there is the possibility of unemployment-inflation trade-off becoming relevant after the adoption of targets. In relation to theBrazilian case, the main point for the attainment of good results for the economy is the neces sity of the monetary regime having a high credibility. |
| JEL: | E52 E58 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:040&r=cba |
| By: | Michael F. Gallmeyer; Burton Hollifield |
| Keywords: | term structure, monetary policy, Taylor rule |
| JEL: | G0 G1 E4 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:676&r=cba |
| By: | Filippo Occhino; John Landon-Lane (Economics Rutgers University) |
| Keywords: | limited participation, segmented markets, Bayesian model comparison, monetary policy shocks. |
| JEL: | C11 C52 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:116&r=cba |
| By: | Alexandre Batista Ferreira; Frederico Gonzaga Jayme Júnior |
| Abstract: | The central purpose of this study is to assess the performance of the inflation targeting regime adopted in Brazil, in a context of high exchange rate volatility, as well as high public debt. In order to accomplish this, a Vector Autoregressive methodology was used. The results suggest that: i) the interest rate is an important instrument of monetary policy; ii) there is presence of inflationary inertia; iii) changes in interest rate to fight inflation can provoke more inflation; iv) the inflation rate is quite sensitive to the exchange rate volatility; v) the inflation rate answers, in way erratic and not significant, to the variations in the government's nominal result; vi) inflation rate response to the innovations in the output gap is not significant; vii) output gap responses to inflation rate shocks does not reveal to be significant; and viii) the monetary policy affects the output gap. The main conclusion is that inflation target in Brazil is limited by the no coordination between monetary and fiscal policies, as well as the external vulnerability. |
| JEL: | E40 E50 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:035&r=cba |
| By: | Jim Engle-Warnick (McGill University); Nurlan Turdaliev (McGill University) |
| Abstract: | We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics. |
| Keywords: | monetary policy, Taylor rule, experimental economics, repeated games |
| JEL: | C91 E42 |
| Date: | 2005–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511022&r=cba |
| By: | Breno Pascualote Lemos; Rodrigo Ayres Padilha; José Luís Oreiro |
| Abstract: | In this paper we perform an analysis of the stability conditions of a macrodynamic model with Walrasian adjustment under three different rules of monetary policy: the maintenance of a constant supply of real money balances, a fixed rule of monetary growth (or Friedman's rule) and the inflation targeting rule. The analysis of the model's stability conditions under study allows us to reach the conclusion that inflation targeting has the greater propensity towards stability than the other rules. This result shows that the wider flexibility in the use of instruments of monetary policy in comparison with the Friedman's rule, in parallels with the non-passivity of the inflation targeting regime in comparison with the constant supply rule, are important characteristics for the obtention of macroeconomic stability. |
| JEL: | E10 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:039&r=cba |
| By: | V. Anton Muscatelli, Patrizio Tirelli and Carmine Trescroci |
| Abstract: | This paper derives a NewKeynesiandynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The mode lis then estimated using US data. We demonstrate that there seems to be a significant role for rule-of-thumb consumer behaviour. Our model is then used to analyse the interaction between Fiscal and monetary policies. We examine the extent to which fiscal policy (automatic stabilisers) assist or hinder monetary policy when the latter takes a standard forward-looking inflation targetingf orm. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers aspects output and inflation variability in the presence of such a monetary policy rule.. |
| JEL: | E58 E62 E63 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_19&r=cba |
| By: | Bruno Silva Martins; Marco Bonomo |
| Abstract: | The objective of this paper is to investigate the potential role of credit market imperfections in transmission mechanism of monetary policy in Brazil. The paper uses the.nancial accelerator model, developed by Bernanke, Gertler and Gilchrist (1999), where the credit channel arises via balance sheet effects. The simulations indicate that the financial accelerator effect. seems to exist in Brazilian economy, and that the microeconomics reforms, recently implemented in Brazil, may change the dynamics of Brazilian economy in the future. |
| JEL: | E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:043&r=cba |
| By: | Qing Liu; Shouyong Shi |
| Keywords: | Currency Area; Monetary Coordination |
| JEL: | F31 C78 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:575&r=cba |
| By: | Carlo Rosa; Giovanni Verga |
| Abstract: | In its Monthly Bulletin of November 2002, the European Central Bank (ECB) stated that themonthly press conference held by its President represents one of its most importantcommunication channels and that it provides a comprehensive summary of the policyrelevant assessment of economic developments. After providing a glossary to translate thequalitative information of the press conferences into an ordered scale, we verify empiricallywhether and to what extent market expectations react to the information released by the ECB.We found that the public not only understand but also believe the signals sent by theEuropean monetary authority. |
| Keywords: | communication, credibility, ECB, glossary, Repo, Euribor, news approach |
| JEL: | E50 E52 E58 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0682&r=cba |
| By: | Lavan Mahadeva; Alex Muscatelli |
| Abstract: | This paper looks at some implications of data uncertainty for monetary policy. We combine national accounts data revisions with optimal control and filtering experiments on a calibrated model to discuss policy implications of price-versus-volume data uncertainty in GDP data for the United Kingdom. We find some degree of negative correlation between revisions to real GDP and GDP deflator data. We develop a methodology for estimating the output gap which takes account of the benefit of hindsight and decreasing measurement errors through time. Our optimal control experiments reveal that monetary policy makers would be led to place greater weight on nominal GDP data and correspondingly less weight on separate, uncertain estimates of prices and volume growth. However, estimates of real growth and also the output gap matter even when there is much uncertainty of this type. Our results also suggest that estimates of the level of inflationary pressure and nominal GDP data become more important when the economy is prone to inflationary overreactions to shifts in technological progress |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:14&r=cba |
| By: | Rodrigo Sekkel; Denisard Alves |
| Abstract: | The purpose of the present study is to identify the effects of monetary policy and macroeconomic shocks on the dynamics of the Brazilian term structure of interest rates. We estimate a near-VAR under the identification scheme proposed by Christiano et al. (1996, 1999). The results resemble that of the US economy: monetary policy shocks flatten the term structure of interest rates. Nevertheless, we find that monetary policy shocks in Brazil appear to explain a significant larger share of the dynamics of the term structure than in the USA. Finally, we also study the importance of standard macroeconomic variables, as GDP, inflation and specially, a measure of country risk for the dynamics of the term structure in Brazil. The empirical evidence allows us to infer that as the Brazilian term structure of interest rates increase its maturities, the more important will macroeconomic shocks be to its determination. |
| JEL: | E53 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:027&r=cba |
| By: | Martin Ellison; Neil Rankin |
| Abstract: | We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we show that the economy will not necessarily tend to the Friedman Rule, as Obstfeld found. Instead it may tend to the critical debt level at which there is no cheating incentive under commitment, and inflation and could well be positive here. |
| Keywords: | Time consistency; optimal inflation-tax smoothing; discretion; commitment; Friedman Rule. |
| JEL: | E52 E61 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0501&r=cba |
| By: | Jinhui H. Bai (Department of Economics, Yale University); Ingolf Schwarz (Max Planck Institute for Research on Collective Goods) |
| Abstract: | The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure are determinate. |
| Keywords: | Money, incomplete markets, fiscal policy, indeterminacy |
| JEL: | D52 E40 E50 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:jep:wpaper:05005&r=cba |
| By: | Louis Bê Duc (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alessandro Calza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); David Marqués Ibáñez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Adrian van Rixtel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Silvia Scopel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | For central banks, the monitoring of financing conditions plays a pivotal role in assessing the actual transmission of monetary policy impulses to borrowers. This paper presents in detail some of the indicators and data used by the ECB to assess financing conditions in the euro area. It also shows how these indicators have been used to provide a broad assessment of developments in financing conditions in the euro area in recent years. The ECB’s analysis of financing conditions is dynamic and seeks to reflect underlying changes in the euro area’s financial structure. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050037&r=cba |
| By: | Marco Del Negro; Christopher Otrok |
| Abstract: | The authors use a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in the Office of Federal Housing Enterprise Oversight’s house price movements from state- or region-specific shocks, estimated on quarterly state-level data from 1986 to 2004. The authors find that movements in house prices historically have mainly been driven by the local (state- or region-specific) component. The recent period (2001–04) has been different, however: “Local bubbles” have been important in some states, but overall the increase in house prices is a national phenomenon. The authors then use a VAR to investigate the extent to which expansionary monetary policy is responsible for the common component in house price movements. The authors find the impact of policy shocks on house prices to be very small. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-24&r=cba |
| By: | Vladimir Kühl Teles; Mauro Miranda |
| Abstract: | The main purpose of this paper is the empirical investigation of the business cycles responses of each of the five Brazilian regions to monetary policy innovations and other shocks. We applied a methodology integrating unobserved components and vector auto-regressions (VAR). We identified not only common and idiosyncratic sources of innovation, but also common and idiosyncratic responses to common shocks. We concluded that the Brazilian regions present asymmetric effects to common monetary shocks. |
| JEL: | R11 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:120&r=cba |
| By: | William Roberds (Research Department Federal Reserve Bank of Atlanta); Stephen Quinn |
| Keywords: | Central banking, commodity money, debasement |
| JEL: | E42 N13 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:318&r=cba |
| By: | Michael Sturm (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Nikolaus Siegfried (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The Gulf Cooperation Council (GCC) plans to introduce a single currency by 2010 in its six member states, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. This paper focuses on selected macroeconomic and institutional issues and key policy choices which are likely to arise during the process of monetary integration. The main findings are that (i) a supranational GCC monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, although this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050031&r=cba |
| By: | Ignazio Angeloni (Italian Ministry of Economy and Finance, Rome, Italy.); Michael Flad (Johann Wolfgang Goethe University, 60054 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper examines diverse aspects of the monetary integration of the ten new Member States (NMS) which joined the EU on 1 May 2004 into the euro area. Most NMS have undergone a rapid and deep transformation in all areas with considerable progress in their processes of reform and convergence, and more is underway. While trade integration with the other 15 EU Member States (EU15) has progressed quickly, convergence in output specialisation to EU standards has been slow, especially if measured in real terms. This may influence negatively the pace of real convergence. Most NMS lag significantly behind in building up and deepening their financial systems. There is also evidence that exchange rate flexibility may still be serving as a useful shock absorber for some NMS, and so far the evidence indicates that real exchange rates have moved, broadly speaking, in line with long term fundamental equilibria. On the positive side, many NMS are quite advanced relative to the euro area in the process of labour market and institutional reform (their labour market structures are more flexible than those of the euro area countries). There is also some evidence that a few NMS have a significant degree of business-cycle synchronisation with the euro area: hence, they may become less likely to be affected by different economic shocks. This, however, is not true for all NMS. The monetary policy institutions of the NMS have also converged to some degree - goals and institutional settings of central banks are now much more similar than before. A case-by-case approach to adopting the euro, based on country-specific conditions, seems natural due to the differences between the countries. |
| Keywords: | Optimum Currency Area, Economic and Monetary Integration, EMU. |
| JEL: | E42 F13 F33 F42 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050036&r=cba |
| By: | Richard G. Anderson; Kevin L. Kliesen |
| Abstract: | The acceleration of productivity growth during the latter half of the 1990s was both the defining economic event of the decade and a major topic of debate among Federal Reserve policymakers. A key aspect of the debate was the conflict between incoming aggregate data, which initially suggested little productivity gain, and anecdotal firm-level evidence which hinted at an acceleration. Some FOMC members feared an overheating economy and higher inflation; others, including the Chairman, argued that revolutionary increases in productivity were occurring and the Committee should not prematurely forgo significant future gains in real income by tightening policy. We review the difficulty of measuring productivity during periods of rapid quality change, the large magnitude of subsequent data revisions during the 1990s, and, from FOMC transcripts, the contemporary monetary policy debate within the FOMC as the decade*s data evolved. |
| Keywords: | Monetary policy ; Production (Economic theory) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-067&r=cba |
| By: | Bullard,James; Schaling,Eric (Tilburg University, Center for Economic Research) |
| Abstract: | We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation. Keywords: Indeterminacy, learning, monetary policy rules, new open economy macroeconomics, exchange rate regimes, second generation policy coordination. |
| Keywords: | indeterminacy;second generation policy coordination; learning;monetairy policy;open economy;macroeconomics;exchange rate |
| JEL: | E58 E61 F31 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2005116&r=cba |
| By: | Pedro Garcia Duarte |
| Abstract: | The introduction of linear-quadratic methods in monetary economics in the 1960s tinged the intense debate about the optimal monetary policy instrument. These methods were widely used outside monetary economics because they delivered easy solutions to complex stochastic models. This same reason explains the success of quadratic loss functions according to the conventional wisdom among monetary economists. In this traditional narrative, Henri Theil and Herbert Simon are often cited by their proofs that models with quadratic objective functions have the certainty equivalence property. This attribute made the solution of these models feasible for the computers available at that time. This paper shows how the use of a quadratic loss function to characterize the behavior of central banks inaugurated an objective or uniform way of talking about optimality. In this respect, the discourse on optimal monetary policy stabilized. Moreover, a richer account of the quadratic approach to monetary policy debate emerges by analyzing how quadratic loss functions were used in operations research and management problems by groups of scientists that included economists like Modigliani and Simon. I argue that feasibility is only one important factor that explains the wide popularity of quadratic functions in monetary economics. |
| JEL: | B22 B23 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:016&r=cba |