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on Dynamic General Equilibrium |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether tariffs address other distortions. |
| Keywords: | Tariffs; Inflation; Optimal monetary policy |
| JEL: | F41 E24 E44 E52 F13 |
| Date: | 2025–03–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmwp:99705 |
| By: | Ginters Buss (Latvijas Banka); Guido Traficante (European University of Rome) |
| Abstract: | This paper studies monetary policy in a New Keynesian model with incomplete information regarding the persistence of cost-push shocks. The central bank and the private sector gradually learn about the persistence of the shock as it propagates through the economy. The central bank adopts a look-through policy in response to temporary cost-push shocks; otherwise, it follows a Taylor rule. If agents initially believe the cost-push shock to be temporary, while the true shock is persistent, it takes some time for the central bank, acting initially under an incorrect assumption, to realise its mistake and switch to monetary tightening. As a result, the actual inflation is higher than in a complete information case. Data-dependent discretionary early liftoff strategies can partially mitigate the effects of the initial policy misjudgment. Contrary to the full-information conditions, the findings cast doubt on the effectiveness of look-through policies in environments of incomplete information, irrespective of the actual persistence of the cost-push shock. |
| Keywords: | monetary policy, imperfect information, cost-push shock, high inflation |
| JEL: | D83 E17 E31 E47 E52 |
| Date: | 2025–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202502 |
| By: | Wamalwa, Peter |
| Abstract: | This paper aims to establish optimal response of monetary policy to output, inflation, and asset price volatility in small open economies of Kenya and Ghana. The paper estimates a monetary policy response function for inflation, asset prices, and output volatility developed from a dynamic stochastic general equilibrium model using quarterly data from 2000 to 2018. The analysis shows that monetary policy accord inflation greatest weight compared to output and asset prices. However, there are differences in the sensitivity of monetary policy across the economies, and hence price, output, and welfare outcomes. The prioritization of inflation stifles output growth more in Ghana than in Kenya due to high interest rate. Despite monetary policy prioritizing inflation in Ghana, average inflation is higher compared to Kenya. Results from dynamic optimization show that a consistent intervention in the economy to stabilize inflation, output, nominal exchange rate, and asset prices, achieves higher welfare. |
| Date: | 2024–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:aer:wpaper:428176bd-f18b-4894-b68b-8b8c212a4eb6 |
| By: | Guillermo Hausmann-Guil (University of Vilnius) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:red:append:24-34 |
| By: | Andrade, Philippe (Federal Reserve Bank of Boston); Gautier, Erwan (Banque de France - Centre de Recherche); Mengus, Eric (HEC Paris); Moench, Emanuel (Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR)); Schmidt, Tobias (Deutsche Bundesbank - Research Center) |
| Abstract: | We study beliefs about fiscal dominance in a survey of German households. We first use a randomized controlled trial to identify how fiscal news impact individual debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals’ views about the fiscal space. News leading individuals to expect higher debt-to-GDP ratios make them more likely to revise upward their inflation expectations. These average effects are due to individuals who think that fiscal resources are more stretched than others. In contrast, individuals who think there is fiscal space do not associate debt with inflation. We then rationalize these results in a New Keynesian model where agents have heterogeneous beliefs about the fiscal space. We show that the heterogeneity of beliefs implies a policy tradeoff for the central bank. Agents who expect fiscal dominance in the future exert upward pressure on inflation. An active central bank may chose to partially tolerate this higher inflation due to the real costs of completely stabilizing prices. |
| Keywords: | fiscal and monetary policy; heterogeneous beliefs; ran- domized control trial; survey data; Inflation expectations |
| JEL: | C83 D84 E31 E63 |
| Date: | 2025–01–14 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1535 |
| By: | Giovanardi, Francesco; Kaldorf, Matthias |
| Abstract: | We study optimal monetary policy in an analytically tractable New Key-nesian DSGE-model with an emission externality. Empirically, emissions are strongly pro-cyclical and output in the flexible price equilibrium overreacts to productivity shocks, relative to the efficient allocation. At the same time, output under-reacts relative to the flexible price allocation due to sticky prices. Therefore, it is not optimal to simultaneously stabilize inflation and to close the natural output gap, even though this would be feasible. Real externalities affect the LQ-approximation to optimal monetary policy and we extend the analysis of Benigno and Woodford (2005) to inefficient flexible price equilibria. For central banks with a dual mandate, optimal monetary policy places a larger weight on output stabilization and targets a non-zero natural output gap, implying a higher optimal inflation volatility. |
| Keywords: | Optimal Monetary Policy, Carbon Emissions, Output Gap, Central Bank Loss Function, Phillips Curve |
| JEL: | E31 E58 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:313014 |
| By: | Kirill Borissov (Non-government Educational Institution "European University at St. Petersburg", Russia); Mikhail Pakhnin (University of the Balearic Islands, Spain); Ronald Wendner (University of Graz, Austria) |
| Abstract: | We study the effects of envy (relative consumption concerns), drawing on evidence that preferences typically exhibit present bias. We employ a Ramsey-type model with agents who differ in initial capital endowments and account for present-biased envy: agents are naive and care about how their consumption levels compare to those of others only in the current period. Present-biased envy, unlike permanent envy, significantly affects both the level of inequality and the aggregate income level in an economy. First, it generates the Matthew effect (the relatively rich get richer while the relatively poor get poorer), and after a finite time, only the initially wealthiest agents own the entire capital stock and the debts of others who are in the maximum borrowing state. Second, in contrast to both an economy without envy or with permanent envy, present-biased envy makes agents effectively more impatient, reducing the long-run capital stock and aggregate income level. |
| Keywords: | Relative consumption, Envy, Time inconsistency, Sliding equilibrium, Perfect foresight, Wealth distribution, Ramsey conjecture. |
| JEL: | D15 D31 D50 D91 O40 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2025-02 |
| By: | Akcigit, Ufuk; Chhina, Raman S.; Cilasun, Seyit Mümin; Miranda, Javier; Serrano-Velarde, Nicolas |
| Abstract: | Utilizing near real-time QuickBooks data from over 1.6 million small businesses and a targeted survey, this paper highlights the critical role credit card financing plays for small business activity. We examine a two year period beginning in January of 2021. A turbulent period during which, credit card usage by small U.S. businesses nearly doubled, interest payments rose by 60%, and delinquencies reached 2.8%. We find, first, monthly credit card payments were up to three times higher than loan payments during this time. Second, we use targeted surveys of these small businesses to establish credit cards as a key financing source in response to firm-level shocks, such as uncertain cash flows and overdue invoices. Third, we establish the importance of credit cards as an important financial transmission mechanism. Following the Federal Reserve's rate hikes in early 2022, banks cut credit card supply, leading to a 15.75% drop in balances and a 10% decline in revenue growth, as well as a 1.5% decrease in employment growth among U.S. small businesses. These higher rates also rendered interest payments unsustainable for many, contributing to half of the observed increase in delinquencies. Lastly, a simple heterogeneous firm model with a cash-in-hand constraint illustrates the significant macroeconomic impact of credit card financing on small business activity. |
| Keywords: | credit, credit cards, entrepreneurship, job creation, small businesses, turnover |
| JEL: | J23 J63 O47 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:313647 |