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on Monetary Economics |
| By: | Aleksander Berentsen; Christopher J. Waller |
| Abstract: | We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-33&r=mon |
| By: | Pierre-Richard Agénor; Koray Alper |
| Abstract: | This paper analyzes the transmission process of monetary policy in a closed-economy New Keynesian model with monopolistic banking, credit market imperfections, and a cost channel. Lending rates incorporate a risk premium, which depends on firms' net worth and cyclical output. The supply of bank loans is perfectly elastic at the prevailing bank rate and so is the provision of central bank liquidity at the official policy rate. The model is calibrated for a middle-income country. Numerical simulations show that credit market imperfections and sluggish adjustment of bank deposit rates (rather than lending rates) may impart a substantial degree of persistence in the response of output and inflation to monetary shocks. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:120&r=mon |
| By: | Andrew Ang; Jean Boivin; Sen Dong; Rudy Loo-Kung |
| Abstract: | We estimate the effect of shifts in monetary policy using the term structure of interest rates. In our no-arbitrage model, the short rate follows a version of the Taylor (1993) rule where the coefficients on the output gap and inflation vary over time. The monetary policy loading on the output gap has averaged around 0.4 and has not changed very much over time. The overall response of the yield curve to output gap components is relatively small. In contrast, the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2.4 in 1983. Long-term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads. |
| JEL: | E4 E5 G1 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15270&r=mon |
| By: | Thórarinn G. Pétursson |
| Abstract: | This paper focuses on two important questions concerning inflation performance in a country sample of forty-two of the most developed countries in the world. The firrst is why inflation tends to be more volatile in some countries than in others, in particular in very small, open economies and emerging market economies compared to the large and more developed ones. The empirical analysis suggests that the volatility of the risk premium in multilateral exchange rates, the degree of exchange rate pass-through to inflation, and monetary policy predictability play a key role in explaining the cross-country variation in inflation volatility. Other variables, related to economic development and size, international trade, output volatility, exposure to external shocks, and central bank independence are not found significant. The second question is what explains the general decline in inflation volatility over the sample period. Using a panel approach, the empirical analysis confirms that the adoption of inflation targeting has played a critical role in this improvement in addition to the three variables found important in the cross-country analysis. Inflation targeting therefore continues to play an important role in reducing inflation volatility even after adding the three controls to the panel analysis. The main conclusions are found to be robust to changes in the country sample and to different estimation methods. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp42&r=mon |
| By: | Aleksander Berentsen; Christopher J. Waller |
| Abstract: | We study optimal monetary stabilization policy in a dynamic stochastic general equilibrium model where money is essential for trade and firm entry is endogenous. We do so when all prices are flexible and also when some are sticky. Due to an externality affecting firm entry, the central bank deviates from the Friedman rule. Calibration exercises suggest that the nominal interest rate should have been substantially smoother than the data if preference shocks were the main disturbance and much more volatile if productivity was the driving shock. This result is a direct consequence of policy actions to control entry. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-32&r=mon |
| By: | J. James Reade; Ulrich Volz |
| Abstract: | This paper considers the costs and benefits of Sweden joining the European Economic and Monetary Union (EMU). We pay particular attention to the costs of abandoning the krona in terms of a loss of monetary policy independence. For this purpose, we apply a cointegrated VAR framework to examine the degree of monetary independence that the Sveriges Riksbank enjoys. Our results suggest that Sweden has in fact relatively little to lose from joining EMU, at least in terms of monetary independence. We complement our analysis by looking into other criteria affecting the cost-benefit calculus of monetary integration, which, by and large, support our positive assessment of Swedish EMU membership. |
| Keywords: | Swedish EMU membership, Monetary policy independence, European monetary integration, Cointegrated VAR method |
| JEL: | E52 E58 F41 F42 C32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:442&r=mon |
| By: | S. Boragan Aruoba; Christopher J. Waller; Randall Wright |
| Abstract: | We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a literature that is more explicit about the frictions making money essential. This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. We show how these elements matter qualitatively and quantitatively. Our numerical results differ from findings in the reduced-form literature. The analysis reduces the previously large gap between mainstream macro and monetary theory. |
| Keywords: | Money ; Monetary theory ; Capital ; Search theory |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-31&r=mon |
| By: | Christopher J. Waller |
| Abstract: | I use the monetary version of the neoclassical growth model developed by Aruoba, Waller and Wright (2008) to study the properties of the model when there is exogenous growth. I first consider the planner's problem, then the equilibrium outcome in a monetary economy. I do so by first using proportional bargaining to determine the terms of trade and then consider competitive price taking. I obtain closed form solutions for the balanced growth path of all variables in all cases. I then derive closed form solutions for the transition paths under the assumption of full depreciation and, in the monetary economy, a non-stationary interest rate policy. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-34&r=mon |
| By: | Katsuhito Iwai (Faculty of Economics, University of Tokyo) |
| Abstract: | "Globalization" can be interpreted as a grand experiment of the laissez-faire doctrine of neoclassical economics that the wider and the deeper markets cover the capitalist economy, the more efficient and the more stable it would become. The "once a hundred years" global economic crisis of 2007-9 demonstrated the grand failure of this grand experiment. Following the lead of Wicksell and Keynes, this article argues that capitalist economy is subject to an inevitable trade-off between efficiency and stability because of its essentially "speculative" nature. First, financial markets need, for their risk-diversifying function, the participation of a large number of risk-taking speculators. But competition among professional speculators is like a Keynesian beauty-contest that constantly exposes financial markets to risks of bubble and bust. Second and more fundamentally, the article maintains that "money" that is the capitalist economy's ultimate source of efficiency is also its ultimate source of instability. Indeed, Wicksell's Interest and Prices showed how a monetary disequilibrium sets off cumulative inflation or deflation, and Keynes' General Theory then pointed out that it is the stickiness of money wage that saves capitalist economy from its inherent instability, albeit at the expense of full employment. This article also contends that such monetary instability has manifested itself in the current crisis in the forms of the collapse of liquidity in the whole financial markets as well as of the decline of confidence on dollar as the global capitalism's key currency. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf646&r=mon |
| By: | Dino Martellato (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | This paper examines the likely direction of real interest rates in the Euro area and the United States from April 2009 on. It is argued that the crisis that began in 2007 and the ensuing recession changed the descending trend in real interest rates which started a long time ago. If real interest rates were to rise too much, private and public finances, housing markets and stock markets would suffer particularly in the countries where the past credit binge and the crisis response has made debts mount, thus prolonging the current crisis. Economic theory should help shed light on the likely future direction of long-term real interest rates. In the paper, growth models are briefly discussed and shown to offer disparate predictions about the level of real interest rates in a growing economy and little practical guidance. Monetary theories, i.e. theories explicitly focused on the role of interest rates in balancing supply and demand in the single markets of the economy, make reference to some normal or natural level of real interest rate but obviously suffer from the difficulties of estimating such normal or natural levels both in general and particularly in a unusually dynamic and uncertain situation such as the current one. The more pragmatic approach, consisting in the assessment of the relevant single components of the long-term real nominal interest rate over the cycle, points to the risks of a surge in the risk premium as well as in expected short-term real interest rates and thus to a prolongation of the current economic contraction. |
| Keywords: | Interest rates |
| JEL: | E4 E5 E1 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2009_14&r=mon |
| By: | Christopher J. Waller |
| Abstract: | The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks and trade amongst themselves in an anonymous manner. Since preference shocks are private information, in a record-keeping economy, the planner's constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents' incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available. |
| Keywords: | Money ; Taxation |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-35&r=mon |
| By: | Steven F. Koch (Department of Economics, University of Pretoria); Adel Bosch (South African Reserve Bank, Pretoria, South Africa) |
| Abstract: | This paper considers household expenditure patterns through the estimation of parametric share estimates. The parameters from these expenditure share estimates are then used to simulate the underlying income transfer (compensating variation) that would be required to offset price increases for various goods. The simulations are considered across the expenditure distribution to provide a series of estimates of the welfare effects of inflation on both poor and non-poor households. Given data limitations, preventing the estimation of substitution effects, non-poor households generally bear the brunt of inflation, primarily due to their larger expenditures. The only exception to the aforementioned generalisation is the impact that food inflation has on low expenditure households relative to high expenditure households. The results in this paper are consistent with the expectation that food inflation has a larger welfare cost to poor households than it does for non-poor households, and we are able to present an estimate of those welfare cost differences. |
| Keywords: | Almost ideal demand system, Compensating variation, Nonparametric density |
| JEL: | D11 D12 C14 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200917&r=mon |
| By: | Hassan Bougrine; Teppo Rakkolainen |
| Abstract: | The literature on growth theory is rich with models attempting to explain growth differences among countries. Several variables have been proposed many of which were found to be positively related to growth. However, a major problem with these models is that the factors explaining growth are endogenously determined by their environment so that a slow-growing or a poor country will find itself helpless because all the crucial variables it has `inherited' are either deficient or inexistent. We propose policyoriented model that empowers (poor or slow-growing) countries in the sense that they can use economic policies to achieve high growth and eliminate the gap of unused productive capacity of society. We demonstrate that such objectives are possible by manipulating some key control variables, namely the rate of interest and the net government spending. |
| Keywords: | growth, maximization, fiscal policy, interest rates, deficit, money |
| JEL: | O11 O23 H2 H3 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp50&r=mon |
| By: | Philip Hans Franses (Econometric Institute, Erasmus University Rotterdam); Michael McAleer (Econometric Institute, Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo); Rianne Legerstee (Econometric Institute and Tinbergen Institute, Erasmus University Rotterdam) |
| Abstract: | The primary purpose of the paper is to answer the following two questions regarding the performance of the influential Federal Open Market Committee (FOMC) of the Federal Reserve System, in comparison with the forecasts contained in the "Greenbooks" of the professional staff of the Board of Governors: Does the FOMC have expertise, and can it forecast better than the staff? The FOMC forecasts that are analyzed in practice are nonreplicable forecasts. In order to evaluate such forecasts, this paper develops a model to generate replicable FOMC forecasts, and compares the staff forecasts, non-replicable FOMC forecasts, and replicable FOMC forecasts, considers optimal forecasts and efficient estimation methods, and presents a direct test of FOMC expertise on nonreplicable FOMC forecasts. The empirical analysis of Romer and Romer (2008) is reexamined to evaluate whether their criticisms of the FOMC's forecasting performance should be accepted unreservedly, or might be open to alternative interpretations. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf648&r=mon |
| By: | Gary B. Gorton; Andrew Metrick |
| Abstract: | When "confidence" is lost, "liquidity dries up." We investigate the meaning of "confidence" and "liquidity" in the context of the current financial crisis. The financial crisis is a manifestation of an age-old problem with private money creation, banking panics. We explain this and provide some evidence with respect to the current crisis. |
| JEL: | G0 G1 G14 G3 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15273&r=mon |