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on Macroeconomics |
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Issue of 2005‒09‒02
eight papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Yunus Aksoy (School of Economics, Mathematics and Statistics, Birkbeck College, University of London); Athanasios Orphanides (Board of Governors of the Federal Reserve System, Washington); David Small (Board of Governors of the Federal Reserve System, Washington); Volker Wieland (Goethe University of Frankfurt, CEPR, and Center for Financial Studies); David Wilcox (Board of Governors of the Federal Reserve System, Washington) |
| Abstract: | Under a conventional policy rule, a central bank adjusts its policy rate linearly according to the gap between inflation and its target, and the gap between output and its potential. Under “the opportunistic approach to disinflation” a central bank controls inflation aggressively when inflation is far from its target, but concentrates more on output stabilization when inflation is close to its target, allowing supply shocks and unforeseen fluctuations in aggregate demand to move inflation within a certain band. We use stochastic simulations of a small-scale rational expectations model to contrast the behavior of output and inflation under opportunistic and linear rules. |
| Keywords: | Inflation targeting, monetary policy, interest rates, policy rules, disinflation |
| JEL: | E31 E52 E58 E61 |
| Date: | 2005–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200519&r=mac |
| By: | Klaus Adam (European Central Bank); Roberto Billi (Center for Financial Studies) |
| Abstract: | Ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with 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. |
| Keywords: | Nonlinear Optimal Policy, Occasionally Binding Constraint, Sequential Policy, Markov Perfect Equilibrium, Liquidity Trap |
| JEL: | E31 E52 |
| Date: | 2005–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200516&r=mac |
| By: | Roberto Billi (Center for Financial Studies) |
| Abstract: | This paper characterizes the optimal inflation buffer consistent with a zero lower bound on nominal interest rates in a New Keynesian sticky-price model. It is shown that a purely forward-looking version of the model that abstracts from inflation inertia would significantly underestimate the inflation buffer. If the central bank follows the prescriptions of a welfaretheoretic objective, a larger buffer appears optimal than would be the case employing a traditional loss function. Taking also into account potential downward nominal rigidities in the price-setting behavior of firms appears not to impose significant further distortions on the economy. |
| Keywords: | Inflation Inertia, Downward Nominal Rigidity, Nonlinear Policy, Liquidity Trap |
| JEL: | C63 E31 E52 |
| Date: | 2005–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200517&r=mac |
| By: | Keith Küster (University of Frankfurt); Volker Wieland (University of Frankfurt) |
| Abstract: | In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB.We find that maximal insurance across this model range in terms of aMinimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion.These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context. |
| Keywords: | Model uncertainty, robustness, monetary policy rules, minimax, euro area. |
| JEL: | E52 E58 E61 |
| Date: | 2005–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200513&r=mac |
| By: | Christopher D. Carroll (Department of Economics, The Johns Hopkins University) |
| Abstract: | This paper introduces a method for solving numerical dynamic stochastic optimization problems that avoids rootfinding operations. The idea is applicable to many microeconomic and macroeconomic problems, including life cycle, buffer-stock, and stochastic growth problems. Software is provided. |
| Keywords: | Dynamic optimization, precautionary saving, stochastic growth model, endogenous gridpoints, liquidity constraints |
| JEL: | C6 D9 E2 |
| Date: | 2005–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200518&r=mac |
| By: | Jean-Marie Dufour; Tarek Jouini |
| Abstract: | Statistical tests in vector autoregressive (VAR) models are typically based on large-sample approximations, involving the use of asymptotic distributions or bootstrap techniques. After documenting that such methods can be very misleading even with fairly large samples, especially when the number of lags or the number of equations is not small, we propose a general simulation-based technique that allows one to control completely the level of tests in parametric VAR models. In particular, we show that maximized Monte Carlo tests [Dufour (2005, Journal of Econometrics)] can provide provably exact tests for such models, whether they are stationary or integrated. Applications to order selection and causality testing are considered as special cases. The technique developed is applied to quarterly and monthly VAR models of the U.S. economy, comprising income, money, interest rates and prices, over the period 1965-1996. <P>Les tests statistiques sur des modèles autorégressifs multivariés (VAR) sont habituellement basés sur des approximations de grands échantillons, qui utilisent une loi asymptotique ou une technique de bootstrap. Après avoir montré que ces méthodes peuvent être très peu fiables, même avec des échantillons de taille assez grande, particulièrement lorsque le nombre des retards ou le nombre d’équations augmentent, nous proposons une technique générale basée sur la simulation qui permet de contrôler parfaitement le niveau des tests dans les modèles VAR paramétriques. En particulier, nous montrons que la technique des tests de Monte Carlo maximisés [Dufour (2005, Journal of Econometrics)] fournit des tests exacts pour de tels modèles, que ceux-ci soient stationnaires ou intégrés. Sélectionner l’ordre du modèle ainsi que tester la causalité au sens de Granger sont étudiés comme problèmes particuliers dans ce cadre. La technique proposée est appliquée à des modèles VAR, trimestriels et mensuels, de l’économie américaine, comprenant le revenu, la monnaie, un taux d’intérêt et le niveau des prix, sur la période 1965-1996. |
| Keywords: | bootstrap, exact test, Granger causality, inflation, interest rate, macroeconomics, maximized Monte Carlo test, money and income, Monte Carlo test, nonstationary model, order selection, VAR, vector autoregression, autorégression vectorielle, bootstrap, causalité au sens de Granger, inflation, macroéconomie, modèle non-stationnaire, monnaie et revenu, sélection de l’ordre, taux d’intérêt, test exact, test de Monte Carlo, test de Monte Carlo maximisé, VAR |
| JEL: | C32 C12 C15 E4 E5 |
| Date: | 2005–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2005s-26&r=mac |
| By: | Jean-Pierre Danthine; André Kurmann |
| Date: | 2005–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:784828000000000299&r=mac |
| By: | Thomas F. Crossley; Hamish W. Low |
| Abstract: | This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We .nd estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility. |
| Keywords: | elasticity of intertemporal substitution, Euler equation estimation, demand systems |
| JEL: | D91 E21 D12 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0537&r=mac |