Neo‐Fisherism and inflation control

According to conventional central banking wisdom, an inflation‐targeting central bank should increase (decrease) its nominal interest rate target when inflation is above (below) its target. According to neo‐Fisherites, conventional central bankers have the sign wrong. Essentially all mainstream macroeconomic models tell us that increases in nominal interest rates increase inflation—in the short run and in the long run. This paper reviews neo‐Fisherian theory and evidence and addresses issues relating to inflation control in low real interest rate environments.     

Equity home bias,incomplete financial markets,and nominal rigidities

Abstract This paper analyzes optimal portfolio decisions in a monetary open‐economy framework. It is found that market completeness and the specific form of nominal rigidities, namely, nominal price vs. nominal wage rigidities, matter for justifying the observed structure of equity holdings. When markets are complete, sticky prices generate a negative correlation between the non‐diversifiable labour income and the profit of domestic firms with respect to the productivity shocks, which explains why households invest little abroad. In contrast, when markets are incomplete, rigidities in goods prices result in a counterfactual ‘super home bias’, because domestic equities provide a good hedge against not only the labour income risk but also the relative price risk. Wage rigidities, however, have the opposite effect. Therefore, nominal rigidities in both goods prices and wage rates are needed to address the empirical composition of gross equity positions under incomplete markets.     

The Fisher hypothesis: a multi-country analysis

This paper tests whether the Fisher hypothesis holds for a sample of 26 countries by assessing the long run relationship between nominal interest rates and inflation rates taking into consideration the short run dynamics of interest rates. The empirical evidence supports the hypothesis that there is a one-to-one relationship between the interest rate and inflation for more than half of the countries under study.     

Improving competition in the non-tradable goods and labour markets: the Portuguese case

This study assesses the macroeconomic impacts of increasing competition in the non-tradable goods and labour markets in Portugal. We lean on evidence that the maintenance of low competition in these markets may have contributed to the recent poor performance of the Portuguese economy. The analysis is performed using PESSOA, a dynamic general equilibrium model for a small-open economy integrated in a monetary union, featuring non-Ricardian characteristics, a multi-sectoral production structure and a number of nominal and real rigidities. We conclude that measures aimed at increasing competition in the Portuguese non-tradable goods and labour markets could induce important international competitiveness gains and be valuable instruments in promoting necessary adjustments within the monetary union framework. However, in the short run, real interest rates are likely to increase, driving consumption and output temporarily downwards.     

Money, capital, and real liquidity effects with habit formation

Abstract.  The money in utility model is reconsidered in the presence of endogenous labour and habits. With standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money, the model exhibits superneutrality in the steady state. Nevertheless, habits give rise to real liquidity effects in the short run. After an increase in the nominal interest rate, employment falls, resulting in a fall in capital accumulation and in the short‐ and long‐term real interest rates. The adjustment of the capital stock is non‐monotonic. Employment and the short‐ and long‐term real interest rates may also adjust non‐monotonically. JEL classification: E22, E52, E58     

Long run determinants and short run dynamics of inflation in Tunisia

The essential idea of this study is to analyse the origins of inflation at short and long runs in Tunisia relying on annual data during the period 1962 to 2003. We also suggest a model that has a structure determined by monetary and structural factors, and estimated by Johansen's cointegration technique. The empirical results show that inflation is explained by mixed factors: monetary ones such as money supply, the interest rate and the real effective exchange rate; and structural ones like the nominal average annual wage rate, the import prices and the real output. The analysis aims at pointing out the long run determinants of inflation and studying its short run dynamics.     

The Fisher effect,survey data and time-varying volatility

In this paper we study the Fisher hypothesis using Livingston survey data on inflation expectations. We propose a simple model for the ex-ante real interest rate where the standard deviation of survey forecasts is used to correct for heteroskedasticity. The findings of this paper contradict earlier studies. We find supportive evidence for the Fisher hypothesis that the nominal interest rate and expected inflation move one-for-one both in the short and the long run. Our results also suggest that the change of US monetary policy does not have significant effect on the dynamics of the ex-ante real interest rate such as previous work assumes.     

INTEREST RATE RULES AND WELFARE IN OPEN ECONOMIES

This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price-setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two-country version of the model.     

MONETARY POLICY DURING JAPAN'S LOST DECADE*

We develop a quantitative costly price adjustment model with capital formation for the Japanese economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long‐run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long‐run interest rate target of 2.3% during the 1990s avoids the zero bound and enhances welfare.     

Wage rigidities and unemployment fluctuations in a small open economy

This study analyzes the implications of the monetary policy for the unemployment rate in a small open economy. We introduce nominal wage rigidities and unemployment into the small open economy version of the dynamic stochastic general equilibrium model. We derive three main findings. First, under nominal wage rigidities, the cyclical properties of the calibrated model, in response to a productivity shock, are consistent with the empirical evidence on a decrease in employment and an increase in real wages. Second, for all the variables considered, the Taylor rule tracks the optimal policy better than the simple rule with unemployment as an argument. Third, regardless of the output or unemployment gap being targeted, it is not optimal that central banks respond to nominal exchange rate variations.     

Monetising the Classical Equations: a theory of circulation

The Classical Equations describe output and income in real terms.To use them to analyse aggregate demand, the transactions theydescribe must be ‘monetised’. A sum of money equalto the wage bill of the capital goods sector can be shown tobe necessary and sufficient to carry out all transactions, ina process of circulation which also defines an expression forvelocity. When money has intrinsic value, the quantity approachmay hold in the short run but, in the long run, money will beendogenous. In these conditions, the rate of interest will bedetermined by the supply and demand for reserves, but when moneyis purely nominal, only a minimum rate will be fixed, and therate of interest will have to be pegged. The Appendix developsthe Classical Equations and shows that they define an invariableunit of account.     

Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

This paper develops and estimates a new-Keynesian dynamic stochastic general equilibrium (DSGE) model for the analysis of fiscal policy in the UK. We find that government consumption and investment yield the highest GDP multipliers in the short-run, whereas capital income tax and public investment have dominating effect on GDP in the long-run. When nominal interest rate is at the zero lower bound, consumption taxes and public consumption and investment are found to be the most effective fiscal instruments throughout the analysed horizon, and capital and labour income taxes are established to be the least effective. The paper also shows that the effectiveness of fiscal policy decreases in a small open-economy scenario and that nominal rigidities improve effectiveness of public spending and consumption taxes, whereas decrease that of income taxes.     

Stock market wealth effects in an estimated DSGE model for Hong Kong

This paper develops and estimates an open-economy dynamic stochastic general equilibrium (DSGE) model of the Hong Kong economy. The model features short-run price rigidities generated by monopolistic competition and staggered reoptimization. We devote special attention to asset prices and wealth effects, which we believe to be important. For this reason we adopt a perpetual-youth approach. Model parameters and unobserved components are estimated with a Bayesian maximum likelihood procedure, conditional on prior information concerning the values of parameters. The estimations identify substantial wealth effects and indicate that the nominal interest rate responds to unexpected movements in stock prices.     

人民币升值的逆传递效应： 基于供给冲击和需求冲击的分析

基于供给冲击与需求冲击的研究视角,本文阐述了人民币升值的逆传递效应的传导机制。运用协整与向量误差修正模型,实证检验了人民币名义有效汇率与人民币对美元的双边名义汇率的逆传递效应。结果表明,无论在长期还是在短期,人民币升值都不具有通货紧缩效应,而是具有逆传递效应,并且名义有效汇率的逆传递效应强于双边名义汇率。     

Monetary policy and transmission mechanism in Brazil: an empirical model

We propose an econometric model for the transmission mechanism in Brazil after the inflation target regime (IT) implementation. We follow the statistical approach based on the LSE methodology by means of the Spanos (J Econom 44:87–105, 1990) categorization. Our proposed model includes the ratios of the debt and primary surplus to the GDP representing the government fiscal effort. We identify two long run relationships that produce new information on how to evaluate the real interest rate and the nominal interest rate links, respectively, with the output gap and the nominal inflation derived from the IS and the interest rule theoretical models. Such specification explores the role played by fiscal variables in monetary transmission; considering the government fiscal effort, a relevant issue for Brazil. We were also able to identify a third long run relationship that might help to uncover how output gap is related not only with nominal variables but also with the debt to the GDP ratio.     

人民币汇率变动影响中国CPI的实证分析

在开放经济条件下,汇率变动对一国通货膨胀水平的决定具有重要作用.人民币名义有效汇率变动对消费者价格指数(CPI)具有传递效应.从长期而言,名义有效汇率与消费者价格指数(CPI)是协整的,且汇率的上升会导致CPI的下降;短期而言,名义有效汇率变动对CPI的冲击具有滞后效应.通过调节人民币名义有效汇率对解决中国的外部失衡有一定的作用,因此货币政策制定者应当积极关注汇率变动等外部冲击.     

Firm-specific capital, nominal rigidities, and the Taylor principle

In the presence of firm-specific capital the Taylor principle can generate multiple equilibria. Sveen and Weinke [New perspectives on capital, sticky prices, and the Taylor principle, J. Econ. Theory 123 (2005) 21-39] obtain that result in the context of a Calvo-style sticky price model. One potential criticism is that the price stickiness which is needed for our theoretical result to be relevant from a practical point of view is somewhat to the high part of available empirical estimates. In the present paper we show that if nominal wages are not fully flexible (which is an uncontroversial empirical fact) then the Taylor principle fails already for some minor degree of price stickiness. We use our model to explain the consequences of both nominal rigidities for the desirability of alternative interest rate rules.     

Budgetary policies in a DSGE model with finite horizons

This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. The model predicts that fiscal expansions generate a trade-off in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.     

Borrow and Adjust: Fiscal Policy and Sectoral Adjustment in an Open Economy*

Should the government run fiscal deficits in response to an adverse external shock that warrants transfer of resources from production of nontraded to traded goods? This article considers normative fiscal policy implications of sectoral adjustment costs in a two‐sector model with overlapping generations. Fiscal deficits benefit present generations by depleting foreign assets and slowing down the adjustment process. We show that despite no nominal rigidities, temporary fiscal deficits increase social welfare if adjustment costs prevent immediate sectoral reallocation of inputs. If there are no adjustment costs, the case for fiscal deficits vanishes.     

Endogenous monetary policy and the liquidity effect

We compare the transmission mechanism of exogenous and endogenous monetary policies in a calibrated small open economy model with nominal and real rigidities. Under an exogenous monetary policy rule it takes implausible values of the intertemporal elasticity of substitution and the price adjustment costs to generate the liquidity and overshooting effects. Endogenous rules with strong feedback to inflation and output help to reproduce the response of the nominal interest and exchange rates to unanticipated monetary policy shocks that characterize the transmission mechanism of standard sticky price models. The liquidty and overshooting effects are always obtained when the model is augmented with a Taylor interest rate rule.JEL Classification: E32, E43Javier Andrés acknowledges support of CICYT grant SEC2002-0026. We thank the comments of two anonymous referees and the editor, Jordi Caballé, to an earlier version of the paper. The views expressed here are those of the authors and do not represent the view of the Banco de España.