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on Central Banking |
| By: | David-Jan Jansen; Jakob de Haan |
| Abstract: | We show that comments by euro area central bankers contain information on future ECB interest rate decisions, but that the comments mainly reflect recent developments in macroeconomic variables. Furthermore, models using only communication variables are outperformed by straightforward Taylor rule models. During the first years of the European Economic and Monetary Union, comments by ECB Executive Board members and high-level Bundesbank policy-makers were more informative than comments by national central bank presidents. We also find that differences of opinion were informative when they concerned the outlook for economic growth. Finally, our results suggest that the ECB used communication especially to signal interest rate increases. |
| Keywords: | central bank communication; interest rate decisions; ECB; Taylor rule; ordered probit models |
| JEL: | E43 E52 E58 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:075&r=cba |
| By: | Michael T. Owyang; Howard J. Wall |
| Abstract: | We find that the magnitudes of the regional effects of monetary policy were considerably dampened during the Volcker-Greenspan era. Further, regional differences in the depths of monetary-policy-induced recessions are related to the concentration of the banking sector, whereas differences in the total cost of these recessions are related to industry mix. |
| Keywords: | Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-002&r=cba |
| By: | Marcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Alexandre Lowenkron (Department of Economics PUC-Rio) |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:508&r=cba |
| By: | Klaus Adam; Roberto M. Billi |
| Abstract: | We determine optimal monetary policy under commitment in a forward-looking 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 imply positive average inflation rates in equilibrium. Interestingly, the presence of binding real rate shocks alters the policy response to (non-binding) mark-up shocks. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-07&r=cba |
| By: | Peng-fei Wang; Yi Wen |
| Abstract: | We document that "persistent and lagged" inflation (with respect to output) is a world wide phenomenon in that these short-run inflation dynamics are highly synchronized across countries. We investigate whether standard monetary models are consistent with the empirical facts. We find that neither the new Keynesian sticky-price model nor the Mankiw-Reis (QJE 2002) sticky-information model can explain the international synchronization of the short-run inflation dynamics. Although the sticky-information model of Mankiw and Reis is very successful in explaining the persistent and lagged inflation dynamics for each individual country, its open-economy analogue fails to explain the synchronization of the inflation dynamics among the countries using calibrated international covariance of monetary shocks. The reason is that the dynamic effects of monetary shocks on inflation in one country cannot be effectively propagated across and preserved in other countries. We conclude that the short-run inflation dynamics and their global synchronization cannot be a monetary phenomenon, but may be instead the consequence of non-monetary shocks. An independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with lagged expectations (e.g., due to sticky information). |
| Keywords: | Money ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-076&r=cba |
| By: | Timothy Kam |
| Abstract: | The typical New-Keynesian small-open-economy model has qualitative features and monetary-policy prescriptions similar to their original closed-economy counterparts - i.e. complete stablization of domestic inflation is sufficient for optimal policy. We consider a version of the model here where that isomorphism no longer holds and where the zero-interest-rate lower bound matters. Under the commitment benchmark, the optimal interest-rate rule is intrinsically intertial. Under time-consistent policy, it is still optimal to delegate policy to an interest-rate smoothing central banker despite the fact that complete stablization od domestic inflation is no longer possible. We thus extend the analysis of Woodford (1999) to a nontrivial small open economy setting. Our result is robust to alternative degrees of pass through, the types of shocks impinging the natural rate, and minor departures from optimal pricing behaviour. |
| JEL: | E32 E52 F41 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-03&r=cba |
| By: | Klaus Adam; Roberto M. Billi |
| Abstract: | Ignoring the existence of the zero bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with an occasionally binding lower bound, calibrated to the U.S. economy, suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy. The fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound. The welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the Phillips curve. These results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-08&r=cba |
| By: | Aloisio Araujo; Mario Pascoa; Juan Pablo Torres-Martinez (Department of Economics PUC-Rio) |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:513&r=cba |
| By: | Troy Davig; Eric M. Leeper; Hess Chung |
| Abstract: | A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique bounded non-Ricardian equilibrium exists in this environment. ; A computational model illustrates that because agents' decision rules embed the probability that policies will change in the future, monetary and tax shocks always produce wealth effects. When it is possible that fiscal policy will be unresponsive to debt at times, active monetary policy (like a Taylor rule) in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks. The paper also considers the implications of policy switching for two empirical issues. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-12&r=cba |
| By: | David L. Reifschneider; John M. Roberts |
| Abstract: | We use simulations of the Federal Reserve's FRB/US model to examine the efficacy of a number of proposals for reducing the consequences of the zero bound on nominal interest rates. Among the proposals are: a more aggressive monetary policy; promises to make up any shortfall in monetary ease during the zero-bound period by keeping interest rates lower in the future; and the adoption of a price-level target. We consider two assumptions about expectations formation. One assumption is fully model-consistent expectations (MCE)--a reasonable assumption when a policy has been in place for some time, but perhaps less so for a newly announced policy. We therefore also consider the possibility that only financial markets have MCE, and that other agents form their expectations using a small-scale VAR model estimated using historical data. All of the policies noted above are highly effective at reducing the adverse effects of the zero bound under MCE, but their efficacy drops considerably when households and firms base their expectations on the historical average behavior of the economy, and only investors fully recognize the economic implications of the various proposals. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-70&r=cba |
| By: | Jan Libich |
| Abstract: | Opponents of inflation targeting have argued that a commitment to a numerical inflation target reduces policy's stabilization flexibility - increasing output volatility under supply shocks. Using a novel game theoretic approach our paper demonstrates that this claim may fail to account for the "anchoring" effect of explicit targets on expectations and wages. Under a credible long-term inflation target and costly acquiring information/wage resetting the public may find it optimal to "look-through" shocks. This makes the policymaker's short-term interest rate instrument more effective in output stabilisation giving it greater leverage over the real rate. As a consequence, the variability trade-off is improved, i.e. volatility of both inflation and output is rediced in equilibrium. Our analysis thus adds another dimenstion to the "rule vs. discretion debate" by showing that a long-run rule may be compatible with (and in fact enhance the effectiveness of) short-run discretion. We conclude by showing that our results are consistent with several empirical findings of the literature. |
| JEL: | E42 E61 C72 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-02&r=cba |
| By: | Troy Davig; Eric M. Leeper |
| Abstract: | Recurring change in a monetary policy function that maps endogenous variables into policy choices alters both the nature and the efficacy of the Taylor principle---the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation. A monetary policy process is a set of policy rules and a probability distribution over the rules. We derive restrictions on that process that satisfy a long-run Taylor principle and deliver unique equilibria in two standard models. A process can satisfy the Taylor principle in the long run, but deviate from it in the short run. The paper examines three empirically plausible processes to show that predictions of conventional models are sensitive to even small deviations from the assumption of constant-parameter policy rules. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-13&r=cba |
| By: | Robert Rich; Charles Steindel |
| Abstract: | This paper provides a review of the concept of core inflation and evaluates the performance of several proposed measures. We first consider the rationale of a central bank in setting its inflation goal in terms of a selected rate of consumer price growth and the use of a core inflation measure as a means of achieving this long-term policy objective. We then discuss desired attributes of a core measure of inflation, such as ease of design, accuracy in tracking trend inflation, and predictive content for future movements in aggregate inflation. Using these attributes as criteria, we evaluate several candidate series that have been proposed as core measures of consumer price index (CPI) inflation and personal consumption expenditure (PCE) inflation for the United States. The candidate series are inflation excluding food and energy, inflation excluding energy, and median inflation, as well as exponentially smoothed versions of aggregate inflation and the aforementioned individual series. ; For PCE inflation, we examine quarterly data starting in 1959. Unlike previous research, we confine our analysis to the methodologically consistent CPI index, which is only available starting in 1978. We find that most of the candidate series, including the familiar ex-food and energy measure, demonstrate the ability to match the mean rate of aggregate inflation and track movements in its underlying trend. In the within-sample analysis, we find that core measures derived through exponential smoothing, in combination with simple measures of economic slack, have substantial explanatory content for changes in aggregate inflation several years in advance. In the out-of-sample analysis, however, we find that no measure performs consistently well in forecasting inflation. Moreover, we document evidence of some parameter instability in the estimated forecasting models. Taken together, our findings lead us to conclude that there is no individual measure of core inflation that can be considered superior to other measures. |
| Keywords: | Inflation (Finance) ; Consumer price indexes ; Consumption (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:236&r=cba |
| By: | Jeremy Rudd; Karl Whelan |
| Abstract: | In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier econometric models of inflation are not. We review the principal conclusions of this literature concerning: 1) the ability of these models to fit the data; 2) the importance of rational forward-looking expectations in price setting; and 3) the appropriate measure of inflationary pressures. We argue that existing rational expectations sticky-price models fail to provide a useful empirical description of the inflation process, especially relative to traditional econometric Phillips curves of the sort commonly employed for policy analysis and forecasting. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-66&r=cba |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods the authors estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. The authors find that the data support the latter specification. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-04&r=cba |