nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒09‒05
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Multiple objectives in monetary policy: a de facto analysis for ‘advanced’ countries By David Cobham
  2. The Institutions of Federal Reserve Independence By Conti-Brown, Peter
  3. Que Nous Révèlent les Fonctions de Réaction à Propos des Préférences des Banques Centrales? By Fiodendji, Komlan
  4. Pushing on a String: US Monetary Policy is Less Powerful in Recessions By Tenreyro, Silvana; Thwaites, Gregory
  5. Inflationary effects of monetary policies in newly industrialized economies with cross-sectoral labor and capital immobility By Chakrabarti, Anindya S.
  6. Currency Crisis Transmission through International Trade By Jamal Ibrahim Haidar
  7. Varieties of Capital Flows: What Do We Know By Levy Yeyati, Eduardo; Zuniga, Jimena
  8. A New Interpretation of the Mechanism for the Determination of Interest Rate and Its Policy Implications By Huang, Wenge; Zhang, Jinsong
  9. The Transmission of Monetary Policy through Redistributions and Durable Purchases By Sterk, Vincent; Tenreyro, Silvana
  10. The Possible Trinity: Optimal interest rate,exchange rate, and taxes on capital flows in a DSGE model for a Small Open Economy By Guillermo Escudé
  11. Analysing South Africa's Inflation Persistence Using an ARFIMA Model with Markov-Switching Fractional Differencing Parameter By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  12. Does Easing Monetary Policy Increase Financial Instability? By Ambrogio Cesa-Bianchi; Alessandro Rebucci
  13. Economic uncertainty: the implications for monetary policy By Rosengren, Eric S.
  14. The Inflation Target at the Zero Lower Bound By Chattopadhyay, Siddhartha; Daniel, Betty C.
  15. A Simple Analytical Model of the Adverse Real Effects of Inflation By Eduardo Bastian; Mark Setterfield
  16. The Euro Crisis: Where to From Here? By Frankel, Jeffrey
  17. Efficacy of New Monetary Framework and Determining Inflation in India: An Empirical Analysis of Financially Deregulated Regime. By Chakraborty, Lekha; Varma, Kushagra Om
  18. Comparing inflation and price level targeting: the role of forward guidance and transparency By Honkapohja, Seppo; Mitra, Kaushik
  19. Always and Everywhere Inflation? Treasuries Variance Decomposition and the Impact of Monetary Policy By Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
  20. The walking dead Euler equation - Addressing a challenge to monetary policy models By A. POISSONNIER
  21. When does the cost channel pose a challenge to inflation targeting central banks? By Smith, Andrew Lee
  22. Does Reserve Accumulation Crowd Out Investments? By Reinhart, Carmen; Reinhart, Vincent; Tashiro, Takeshi
  23. A Probability-Based Stress Test of Federal Reserve Assets and Income By Christensen, Jens H. E.; Lopez, Jose A.; Rudebusch, Glenn D.
  24. Nominal GDP Targeting for Middle-Income Countries By Frankel, Jeffrey
  25. (Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier By Vincent Belinga; Constant Lonkeng Ngouana
  26. Exchange rate regimes and current account adjustment: an empirical investigation By Eguren-Martin, Fernando
  27. Is optimal monetary policy always optimal? By Davig, Troy A.; Gurkaynak, Refet S.
  28. Lower for Longer: Neutral Rates in the United States By Andrea Pescatori; Jarkko Turunen
  29. Macro-Financial Stability under EMU By Philip R. Lane;
  30. Inflation-Forecast Targeting: Applying the Principle of Transparency By Kevin Clinton; Charles Freedman; Michel Juillard; Ondra Kamenik; Douglas Laxton; Hou Wang

  1. By: David Cobham
    Abstract: A statistical methodology is developed by which realised outcomes can be used to identify, for calendar years between 1974 and 2012, when policymakers in ‘advanced’ economies have successfully pursued single objectives of different kinds, or multiple objectives. A simple criterion is then used to distinguish between multiple objectives pure and simple and multiple objectives subject to a price stability constraint. The overall and individual country results which this methodology produces seem broadly plausible. Unconditional and conditional analyses of the inflation and growth associated with different types of objectives reveal that multiple objectives subject to a price stability constraint are associated with roughly as good economic performance as the single objective of inflation. A proposal is then made as to how the remit of an inflation-targeting central bank could be adjusted to allow it to pursue other objectives in extremis without losing the credibility effects associated with inflation targeting.
    JEL: E52 E58 F33
    Date: 2015
  2. By: Conti-Brown, Peter (Stanford University)
    Abstract: The Federal Reserve System has come to occupy center stage in the formulation and implementation of national and global economic policy. And yet, the mechanisms through which the Fed creates that policy are assumed but rarely analyzed. These assumptions--of scholars, central bankers, and other policy-makers--are that the Fed's independent authority to make policy is created by law: specifically, the Federal Reserve Act with its creation of removability protection for actors within the Fed, long tenures for Fed Governors, and budgetary autonomy from Congress. This article analyzes these assumptions about law and argues that nothing about them is as it seems. Removability protection does not exist for the Fed Chair, but exists in unconstitutional form for the Reserve Bank presidents; the fourteen-year terms of the Governors are never served, giving every President since FDR twice the appointments the Federal Reserve Act anticipated; and the budgetary independence designed in 1913 bears little relationship to the budgetary independence of 2015. The article thus challenges the prevailing accounts of agency independence in administrative law and central bank independence in economics and political science, both of which focus on statutory mechanisms of creating Fed independence. It argues, instead, that the life of the Act--how its statutory terms are interpreted, how the legal and economic contexts change with the times, and how individual personalities influence policy-making--is more important to understanding Fed independence than the birth of the Act, the language passed by Congress. Fed independence is not simply a creature of statute, but an ecosystem of formal and informal institutional arrangements, within and beyond the control of the ac-tors and organizations most interested in controlling Fed policy.
    Date: 2015–04
  3. By: Fiodendji, Komlan
    Abstract: Since Taylor’s (1993) paper researchers have invested a lot effort to estimation of monetary policy rules. Taylor (1993) showed that a simple reaction function of the central bank, with the interest rate as a monetary policy instrument and inflation and the output gap as explanatory variables, pretty much describes the rate (of Basic interest) of the Federal Reserve (US) between 1987 and 1992. Frequently, the Taylor rule coefficients are interpreted as if they reflect the preferences of the central bank. However, such an interpretation can lead to poor decision making. In this study, we show that the Taylor rule coefficients are complicated terms including preferences parameters as well as parameters associated with the structure of the economy. We illustrate our conclusion that the coefficients of the Taylor rule cannot be interpreted as reflecting the preferences of the central bank by estimating standard forward-looking Taylor rules for the BCEAO and to compare these with our results obtained by the method of Favero and Rovelli (2002), in order to detect the preferences of the central bank. This analysis leads us to the conclusion that the coefficients of the Taylor rule cannot be interpreted as indicators of the preferences of the central bank. Our results reveal that BCEAO authorities have preferences for smoothing interest rates and the stabilization of the output gap, however, the 2% inflation target is a major challenge.
    Keywords: Taylor rule, Preferences, Reaction function, GMM approach, BCEAO
    JEL: E5 E58
    Date: 2015–05
  4. By: Tenreyro, Silvana; Thwaites, Gregory
    Abstract: We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.
    Keywords: assymetric effects of monetary policy; monetary policy
    JEL: E1 E31 E32 E52 E58
    Date: 2015–08
  5. By: Chakrabarti, Anindya S.
    Abstract: This paper studies the effects of monetary policies in newly industrialized economies characterized by extremely low level of labor and capital mobility between urban and rural sectors. Policies are executed in the urban sector which sends waves of adjustments in the rest of the economy. I show that with liquidity constraints and immobility in labor and capital, the sector- specific effects are markedly different from those in a one-sector economy. In particular, they are asymmetric and the rural sector lags behind the urban sector during the adjustment process. This explains temporary phases of significantly high inflaction with uneven sectoral effects which often accompany major reforms in the banking and monetary institutions of such economies, e.g. in case of India. Finally, as the consumption patterns alter in such an economy undergoing structural changes, the sectoral distribution of liquidity is affected inducing dissimilar responses to shocks, both within and between sectors.
  6. By: Jamal Ibrahim Haidar
    Abstract: The Eurozone recent crisis has shown how balance of payments problems in less developed European Monetary Union (EMU) member countries can affect EMU trading partners, spreading the crisis to a larger group of countries. This paper introduces a three-country dynamic general equilibrium model to analyze whether and how terms of trade effects can generate a spillover effect or a currency crisis transmission between countries. Specifically, using a two period model, it incorporates world market clearing conditions for tradables into a new theoretic model, analyzes net capital flow movements between countries, and establishes cross-border macroeconomic linkages. This paper shows how a currency crisis can transmit through the real (trade) sector channel of the economy.
  7. By: Levy Yeyati, Eduardo (Harvard University and Universidad Torcuato di Tella); Zuniga, Jimena (Universidad Torcuato di Tella)
    Abstract: Capital flows have been the subject of key policy concern since the Brady plan launched the emerging markets asset class. Their massive volume, coupled with their volatile and procyclical nature, is often associated with a variety of financial and real risks: excess exchange rate volatility (gradual overvaluation and sharp corrections), dollar liquidity crunches, distressed asset sales, and crisis propensity. These risks have changed over time. Emerging market crises in the 1990s and 2000s were inherently driven by financial dollarization and balance sheet effects, the latter were intimately related with capital inflows in the form of growing foreign liability positions. But, now that financial dollarization has receded in the emerging market word (either through debt deleveraging or international reserve accumulation), the focus shifted to the macroeconomic effects of cross market flows, including extended periods of exchange rate misalignment and the amplification of business cycles in a context of large and persistent terms-of-trade shocks and global liquidity swings. Hence, the difficulty of evaluating capital flows based on data mostly from the 1990s and early 2000s. Hence, also, the emphasis on the recent empirical literature that revisits the issue with fresh data and an open mind.
    Date: 2015–05
  8. By: Huang, Wenge; Zhang, Jinsong
    Abstract: This paper first indicates that saving equals to the liquidity preference plus the supply of loanable funds and the liquidity preference is just opposite to the supply of loanable funds. Meanwhile, the paper proposes a new model in which interest rate is determined by the investment demand curve and the symmetrical curve of the liquidity preference curve about Y axis. On such basis, the paper notes that the existence of liquidity preference makes effective demand always deficient. Thus market failure becomes the norm and the government is obliged to take aim at the interest rate which is determined by the desired investment and desired saving. So far the paper has thoroughly clarified how interest rate is determined and constructed a new and compact macroeconomic analytical framework. Further, the paper attempts to discuss the new model’s inspiration to Taylor rule and other deductions brought by the new model.
    Keywords: liquidity preference, supply of loanable funds, saving, determination of interest rate, insufficient effective demand
    JEL: E12 E43 E52
    Date: 2015–06–30
  9. By: Sterk, Vincent; Tenreyro, Silvana
    Abstract: The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    Keywords: durable goods; monetary policy; open market operations; redistributive effects of monetary policy; transmission mechanism
    JEL: E1 E31 E32 E52 E58
    Date: 2015–08
  10. By: Guillermo Escudé (Central Bank of Argentina)
    Abstract: A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.
    Keywords: DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy
    JEL: E58 O24
    Date: 2015–03
  11. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria Author-Email:
    Abstract: We test the inertial properties of South African inflation in a Markov-Switching autoregressive fractionally integrated moving average model. This allows us to test for long memory and study the persistence of inflation in multiple regimes. We show that inflation is more volatile and persistent during high inflation episodes relative to low inflation episodes. We estimate that it takes approximately 70 months for 50 percent of the shocks to dissipate in a high inflation regime compared to 10 months in a low inflation regime.
    Keywords: Inflation persistence; MS-ARFIMA; inflation regimes
    JEL: E31 C20
    Date: 2014
  12. By: Ambrogio Cesa-Bianchi; Alessandro Rebucci
    Abstract: This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policies. There are two main results. First, real interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective regulatory framework aimed at preserving financial stability.
    Keywords: Financial crises;Financial stability;Econometric models;Automatic stabilizers;Real interest rates;Macroprudential Policy;Monetary policy;United States;Macro-prudential policies, credit frictions, interest rate rigidities, interest, interest rate, interest rates, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–06–26
  13. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at The Global Interdependence Center's Seventh Annual Rocky Mountain Economic Summit, Victor, Idaho, July 10, 2015.
    Date: 2015–07–10
  14. By: Chattopadhyay, Siddhartha; Daniel, Betty C.
    Abstract: We propose that the monetary authority adopt the inflation target as a time varying policy instrument at the zero lower bound (ZLB) with the same zeal with which they have adopted a fixed inflation target away from the ZLB. Specifically, after an extreme adverse shock reduces demand, the monetary authority promises future inflation by raising the inflation target in the Taylor Rule and announcing its persistence over time. The loss under our proposed policy is very similar to that under optimal monetary policy with the advantage that it is cummuicable using the language of the inflation target and implementable using the Taylor Rule. We also show that the inflation target and its persistence could be raised high enough to keep the economy away from the ZLB, but welfare costs are large.
    Keywords: New-Keynesian Model, Inflation Target, Liquidity Trap
    JEL: E52 E58 E63
    Date: 2014–07–31
  15. By: Eduardo Bastian (Federal University of Rio de Janeiro (UFRJ)); Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: The essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy, wherein a role for money in the determination of real activity is posited from the very start. We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.
    Keywords: Inflation, strato-inflation, hyper-inflation, indexation, conflicting claims, uncertainty, growth.
    JEL: E31 O41 E12
    Date: 2015–08
  16. By: Frankel, Jeffrey (Harvard University)
    Abstract: Germans cannot agree to unlimited bailouts of euro members. On the other hand, if they had insisted on the founding principles (fiscal constraints, "no bailout clause," and low inflation as the sole goal of the ECB), the euro would not have survived the post-2009 crisis. The impact of fiscal austerity has been to raise debt/GDP ratios among periphery countries, not lower them. The eurozone will endure, but through a lost decade of growth. It would help if the ECB further eased monetary policy, which it could do by buying US treasury bonds rather than eurozone bonds. Still needed is a long-run fiscal regime to address the moral hazard problem. Two worthwhile proposals are blue bonds and the delegation of forecasting to independent fiscal agencies.
    JEL: F33 F40
    Date: 2015–03
  17. By: Chakraborty, Lekha (National Institute of Public Finance and Policy); Varma, Kushagra Om (National Institute of Public Finance and Policy)
    Abstract: Against the backdrop of the new monetary policy framework, this paper analyses the determinants of inflation in the deregulated financial regime. The paper upfront has been kept free from adherence to any particular school of thought on inflation, particularly fiscal theories of price determination (where inflation targeting is emphasised) and the monetarist axioms. Using the ARDL methodology, the determinants of inflation based on Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have been empirically tested for the financially deregulated period. The results reveal that the supply-side variables are indeed significant and have a considerable effect on inflation. This result has policy implications especially in the context of a shift from discretion to rule-based monetary policy in the context of India.
    Keywords: Inflation ; Supply side ; ARDL
    JEL: C E E H
    Date: 2015–08
  18. By: Honkapohja, Seppo (Bank of Finland); Mitra, Kaushik (University of Birmingham)
    Abstract: We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
    Keywords: adaptive learning; monetary policy; inflation targeting; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2015–04–07
  19. By: Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
    Abstract: This paper investigates the sources of variation in Treasury bonds returns and the role of monetary policy over the last three decades. At the first stage of our analysis, we decompose unexpected excess returns on 2-, 5- and 10-year Treasury bonds in three components related to revisions in expectations (news) about future excess returns, inflation and real interest rates. Our results indicate that inflation news is the key driver of Treasury bond returns. At the second stage, we evaluate the impact of conventional and unconventional monetary policy on Treasury bond returns and their components. We find that the positive impact of monetary policy easing on Treasury bond returns is largely explained through downward revisions in inflation expectations.
    Keywords: Bond Market Variance Decomposition; Monetary Policy; Financial Crisis.
    JEL: G12 G01 E44 E52
    Date: 2015–09
  20. By: A. POISSONNIER (Insee)
    Abstract: Despite some strong cases built against it, the Euler equation on consumption remains a cornerstone of monetary policy models. In this paper I test the representative household's consumption-savings trade-off in two original directions. I first use households' specific interest rates for both US and France. These rates have a better explanatory power of the representative consumer's behaviour than the monetary policy rate. I also use a less restrictive approach to measure households' expectations based on survey data. However, the challenge posed by the Euler equation to monetary policy models remains.
    Keywords: Euler equation, consumption
    JEL: E21 D91
    Date: 2015
  21. By: Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules are often found to result in indeterminacy, even if the central bank also targets output. In this case, adding money growth as an intermediate target in the Taylor rule can alleviate this indeterminacy and anchor inflation expectations. Whether the money growth target should be a constant feature of the central bank's policy rule or Markov-Switch depends on the weight the central bank places on output stability relative to inflation stability and the size of money demand shocks.
    Keywords: Cost channel; Money; Regime switching; Taylor principle
    JEL: E30 E40 E50
    Date: 2015–06–01
  22. By: Reinhart, Carmen (Harvard University); Reinhart, Vincent (American Enterprise Institute); Tashiro, Takeshi (Japanese Ministry of Economy Trade and Industry and RIETI, Tokyo)
    Abstract: It is understood that investment serves as a shock absorber in times of crisis. The duration of the drag on investment, however, is perplexing. For the Asian economies we study, average investment/GDP is about 6 percentage points lower during 1998-2014 than its average level in the decade before the Asian crisis; the decline is greater if China is excluded. We document how in the wake of crisis home bias in finance increases markedly as public and private sectors look inward when external financing becomes prohibitively costly or undesirable from a financial stability perspective. Reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out and leakages, driven importantly by rising home bias in finance and by official capital outflows. We present evidence from Asia and advanced European economies with managed currencies to support this interpretation.
    JEL: E20 F30 F40 F50 G15 H60
    Date: 2015–07
  23. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Lopez, Jose A. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco)
    Abstract: To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed's associated interest rate risk--including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed's losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation.
    JEL: E43 E52 E58 G12
    Date: 2013–12
  24. By: Frankel, Jeffrey (Harvard University)
    Abstract: It has been proposed that central banks should target Nominal GDP (NGDP), as an alternative to targeting the money supply, exchange rate, or inflation. But the proposal appears in the context of the largest advanced economies. In fact NGDP Targeting may be more appropriate for middle-sized middle-income countries. The reason is that such countries are more often subject to large supply shocks and terms of trade shocks. Such unexpected shocks can force the credibility-damaging abandonment of CPI targets or exchange rate targets that had been previously declared. But they do not require the abandonment of a nominal GDP target, which automatically divides an adverse supply shock equally between impacts on inflation and real GDP. The argument can be illustrated in a model where the ultimate objective is minimizing a quadratic loss function in output and inflation but a credible rule is needed in order to prevent an inflationary bias that arises under discretion. A NGDP rule dominates IT unless the Aggregate Supply curve is especially steep or the weight placed on price stability is especially high. Parameters estimated for the cases of India and Kazakhstan suggest that the Aggregate Supply curve is flat enough to satisfy the necessary condition. The general argument applies regardless whether the monetary authorities at a particular time seek credible disinflation, credible reflation, or simply a credible continuation of the recent path.
    JEL: E52 F41
    Date: 2014–07
  25. By: Vincent Belinga; Constant Lonkeng Ngouana
    Abstract: This paper provides estimates of the government spending multiplier over the monetary policy cycle. We identify government spending shocks as forecast errors of the growth rate of government spending from the Survey of Professional Forecasters (SPF) and from the Greenbook record. The state of monetary policy is inferred from the deviation of the U.S. Fed funds rate from the target rate, using a smooth transition function. Applying the local projections method to quarterly U.S. data, we find that the federal government spending multiplier is substantially higher under accommodative than non-accommodative monetary policy. Our estimations also suggest that federal government spending may crowd-in or crowd-out private consumption, depending on the extent of monetary policy accommodation. The latter result reconciles—in a unified framework—apparently contradictory findings in the literature. We discuss the implications of our findings for the ongoing normalization of monetary conditions in advanced economies.
    Keywords: Central banks and their policies;Econometric models;Sensitivity analysis;Shock identification;Monetary policy;Fiscal stimulus and multipliers;Fiscal policy;Government expenditures;Spending multiplier, accommodative monetary policy, local projections, government spending, interest rates, interest, Quantitative Policy Modeling, Comparative or Joint Analysis of Fiscal and Monetary or Stabilization Policy,
    Date: 2015–05–27
  26. By: Eguren-Martin, Fernando (Bank of England)
    Abstract: The acceleration in the formation of global imbalances in the period preceding the last financial crisis prompted a revival of the debate on whether exchange rate regimes affect the flexibility of the current account (ie its degree of mean reversion), as originally proposed by Friedman (1953). I analyse this relation systematically using a panel of 180 countries over the 1960–2007 period. In contrast to pioneering work on the subject, I find robust evidence that flexible exchange rate arrangements do deliver a faster current account adjustment among non-industrial countries. Additionally, I try to identify channels through which this effect could be taking place. Evidence suggests that exports respond to expenditure-switching behaviour by consumers when faced with changes in international relative prices. There is mixed evidence of credit acting as an additional avenue of influence.
    Keywords: External dynamics; exchange rate regimes; current account imbalances.
    JEL: F31 F32 F33 F41
    Date: 2015–08–21
  27. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Gurkaynak, Refet S.
    Abstract: No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.
    Date: 2014–12–01
  28. By: Andrea Pescatori; Jarkko Turunen
    Abstract: We use a semi structural model to estimate neutral rates in the United States. Our Bayesian estimation incorporates prior information on the output gap and potential output (based on a production function approach) and accounts for unconventional monetary policies at the ZLB by using estimates of “shadow†policy rates. We find that our approach provides more plausible results than standard maximum likelihood estimates for the unobserved variables in the model. Results show a significant trend decline in the neutral real rate over time, driven only in part by a decline in potential growth whereas other factors (including excess global savings) matter. Neutral rates likely turned negative during the Global Financial Crisis and are expected to increase only gradually looking forward.
    Keywords: Monetary policy;United States;Neutral interest rate, output, interest, output gap, interest rates, General, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–06–24
  29. By: Philip R. Lane (Department of Economics, Trinity College Dublin);
    Abstract: This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the Ofinancial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability.
    Keywords: EMU, financial stability, macroprudential
    JEL: E50 F30 F32
    Date: 2015–08
  30. By: Kevin Clinton; Charles Freedman; Michel Juillard; Ondra Kamenik; Douglas Laxton; Hou Wang
    Abstract: Many central banks in emerging and advanced economies have adopted an inflation-forecast targeting (IFT) approach to monetary policy, in order to successfully establish a stable, low-inflation environment. To support policy making, each has developed a structured system of forecasting and policy analysis appropriate to its needs. A common component is a model-based forecast with an endogenous policy interest rate path. The approach is characterized, among other things, by transparent communications—some IFT central banks go so far as to publish their policy interest rate projection. Some elements of this regime, although a work still in progress, are worthy of consideration by central banks that have not yet officially adopted full-fledged inflation targeting.
    Keywords: Central banks and their policies;Inflation targeting;Monetary policy;Optimal Control, inflation, interest, interest rate, central bank, General,
    Date: 2015–06–24

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