The evolution of U.S. monetary policy: 2000–2007

A vector autoregression with time-varying parameters is used to characterize changes in Federal Reserve policy that occurred from 2000 through 2007 and describe how they affected the performance of the U.S. economy. Declining coefficients in the model׳s estimated policy rule point to a shift in the Fed׳s emphasis away from stabilizing inflation over this period. More importantly, however, the Fed held the federal funds rate persistently below the values prescribed by this rule. Under this more discretionary policy, inflation overshot its target and the funds rate followed a path reminiscent of the “stop-go” pattern that characterized Fed behavior prior to 1979.     

Alternative modes of deficit financing and endogneous monetary and fiscal policy in the U.S.A. 1923–1982

This paper first investigates the effects of alternative modes of deficit financing on the unemployment rate, the inflation rate and the real interest rate, within the framework of a small complete macroeconomic model. Secondly, it examines the nature of monetary and fiscal reaction functions. The two periods 1923–1960 and 1961–1982 are considered, with substantial differences in behaviour and policy being shown to exist between them. The most important conclusion is that long-run monetary neutrality properties shown to exist over the latter period are not intrinsic to the U.S. economy, but rather are the result of the stabilization policies being conducted over that period.     

Impact of uncertainty on high frequency response of the U.S. stock markets to the Fed's policy surprises

This paper examines the impact of uncertainty on estimated response of stock returns to U.S. monetary policy surprise. This is motivated by the Lucas island model which suggests an inverse relationship between the effectiveness of a policy and the level of uncertainty in the economy. Using high frequency daily data from the Federal funds futures market, we first estimate the response of S&P 500 stock returns to monetary policy surprises within the time varying parameter (TVP) model. We then analyze the relationship of these time varying estimates with the benchmark VIX index and alternative measures of uncertainty. Evidence suggests a significant negative relationship between the level of uncertainty and the time varying response of S&P 500 stock returns to unanticipated changes in the interest rate. Thus, at higher levels of uncertainty the impact of monetary policy shocks on stock markets is lower. The results are robust to different measures of uncertainty.     

Assessing the Powell policy review

To understand both how it controls inflation and how it trades off inflation with its goal of maximum employment, the Federal Reserve System uses a Keynesian framework in which monetary policy moves the unemployment rate relative to a presumed full employment value, termed the NAIRU (non‐accelerating inflation rate of unemployment). Because it does not know the value of the NAIRU, it pursues an expansionary monetary policy until inflation rises. This policy risks reviving the inflationary monetary policy of the 1970s.     

Mitigation of the Lucas critique with stochastic control methods

Lucas (In: Brunner, K., Meltzer, A.H. (Eds.), The Phillips Curve and the Labor Markets, Supplementary Series to the Journal of Monetary Economics, 1976, pp. 19–46) pointed out, that when optimization is performed on a deterministic macro model, the resulting policy may not reflect the true optimal solution. Private agents may react to announced policies and consequently model parameters will start to drift. The aim of this paper is to develop a methodology for deriving an optimal policy in the presence of rational expectations and parameter drift. This drift is captured by a stochastic optimization framework with time-varying parameters. The resulting optimal policy is capable of tracking changes in the parameters due to policy changes. A numerical example illustrates how the methodology provides a way to mitigate the effects of the Lucas critique.     

通货膨胀背景下的中国经济增长

当前我国物价水平仍然较高,与改革开放以来的前几次通货膨胀有所类似.本次通货膨胀的原因也可归结为中国传统增长模式中常出现的“两难困境”,即长期以来,中国经济增长过度依赖于政府投资,银行信贷与货币的发放难以受到控制,经济高增长的同时始终存在着高通货膨胀的风险,而高通货膨胀所带来的企业生产成本的上升反过来又挤压企业经营利润,从而降低经济增长率.可以预计的是,在货币政策作用空间有限的背景下,此次通货膨胀的压力将持续一段时间.能否处理好总量和结构、抑制通货膨胀和促进经济增长的关系,关键取决于货币政策与财政政策的有机配合.     

Estimating the Bank of Mexico’s reaction function in the last three decades: A Bayesian DSGE approach with rolling-windows

This paper uses a small open economy Dynamic Stochastic General Equilibrium (DSGE) model to investigate how Mexico’s central bank has conducted its monetary policy in the period 1995–2019. The main objective of the paper is to document the systematic changes in the Bank of Mexico’s reaction function by analyzing possible shifts in the parameters of the policy rule. The central bank’s policy is modeled using a Taylor rule that relates the nominal interest rate to output, inflation, and the exchange rate. I employ Bayesian computational techniques and conduct rolling-window estimations to explicitly show the transition of the policy coefficients over the sample period. Furthermore, the paper examines the macroeconomic implications of these changes through rolling-window impulse–response functions. The results suggest that the Bank of Mexico’s response to inflation has been steady since 1995, while the response to output and the exchange rate has decreased and stabilized after 2002.     

Monetary Policy Rules, Policy Preferences, and Uncertainty: Recent Empirical Evidence

We survey recent empirical evidence on monetary policy rules, and find that the emphasis in the political economy literature on institutional design (e.g. central bank independence and inflation targeting) is exaggerated. Formal institutional reform seems neither a necessary nor a sufficient condition for the observation of shifts in monetary policy rules. However, there is no doubt that in some cases (e.g. the UK following the start of inflation targeting in 1992, and Bank of England Independence in 1997), a major shift in monetary policy conduct is detectable. We also highlight the problems in explicitly testing the predictions of the political economy literature. Semi-structural modelling approaches, such as time-varying VAR models may be more useful in understanding policy rules, and the interaction between policy shifts and changes in the transmission mechanism.     

The Effect of Incomes Policies on Inflation in Bulgaria and Poland

Transition countries, and many other countries with incomplete markets, have faced long periods with both high inflation and unemployment. Policies to reduce inflation without high unemployment include incomes policies, which were widely employed in transition countries. This paper studies the effects of incomes policies on inflation in Bulgaria and Poland in 1990-1993. The actual policies, which were complex and changing, are examined. The policies do not appear well-designed in a technical sense to reduce inflation. A time-series analysis is made which includes standard determinants of inflation including past inflation, wage increases, exchange rate changes, and monetary changes, plus a dummy for incomes policies. The regressions are fairly successful in fitting standard factors that should influence inflation, particularly the exchange rate and unemployment in Bulgaria and wages and unemployment in Poland. They find a fairly substantial inflation-reducing effect from the Bulgarian policy but no significant results from the Polish policy. This revised version was published online in July 2006 with corrections to the Cover Date.     

What determines inflation in the US,job growth or unemployment?

An empirical investigation of postwar US data reveals that movements in inflation are much more strongly associated with job growth than the unemployment rate. Job growth is found to be strongly related to inflation even after accounting for the effect of the unemployment rate. The residual influence of the unemployment rate on inflation is small, however, after accounting for the effect of job growth. The data shows that in the past inflation has tended to decline when job growth is weak even if unemployment is low. This suggests that the relatively slow job growth of recent years may partly explain the puzzle that, during much of the current expansion, the US economy has experienced little inflation in spite of low unemployment.     

Optimal monetary policy under incomplete markets and aggregate uncertainty: A long-run perspective

This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy by changing real returns of nominal bonds via variation in expected inflation. Optimal expected inflation is procylical and on average higher than without uncertainty. Simple inflation targeting rules closely approximate the optimal monetary policy.     

Assessing the Transmission of Monetary Policy Using Time‐varying Parameter Dynamic Factor Models*

This article extends the current literature which questions the stability of the monetary transmission mechanism, by proposing a factor‐augmented vector autoregressive (VAR) model with time‐varying coefficients and stochastic volatility. The VAR coefficients and error covariances may change gradually in every period or be subject to abrupt breaks. The model is applied to 143 post‐World War II quarterly variables fully describing the US economy. I show that both endogenous and exogenous shocks to the US economy resulted in the high inflation volatility during the 1970s and early 1980s. The time‐varying factor augmented VAR produces impulse responses of inflation which significantly reduce the price puzzle. Impulse responses of other indicators of the economy show that the most notable changes in the transmission of unanticipated monetary policy shocks occurred for gross domestic product, investment, exchange rates and money.     

How should monetary policy respond to changes in the relative price of oil? Considering supply and demand shocks

This paper examines optimal monetary policy in a New Keynesian model where supply and demand shocks affect the price of oil. Optimal policy fully stabilizes core inflation when wages are flexible. The nominal rate rises (falls) in response to the demand (supply) shock. With sticky wages core inflation falls (rises) in response to the demand (supply) shock. Impulse response functions from a VAR estimated with post-1986 U.S. data show minimal movement in core inflation in response to both shocks. The federal funds rate rises (falls) in response to the demand (supply) shock, consistent with the predictions from the theoretical model for policy that stabilizes core inflation.     

Monetary Policy in the Greenspan Era: A Time Series Analysis of Rules vs. Discretion*

Relationships between the Federal funds rate, unemployment, inflation and the long‐term bond rate are investigated with cointegration techniques. We find a stable long‐term relationship between the Federal funds rate, unemployment and the bond rate. This relationship is interpretable as a policy target because deviations are corrected via the Federal funds rate. Deviations of the actual Federal funds rate from the estimated target give simple indications of discretionary monetary policy, and the larger deviations relate to special episodes outside the current information set. A more traditional Taylor‐type target, where inflation appears instead of the bond rate, does not seem congruent with the data.     

Inflation Sensitivity To Monetary Policy: What Has Changed since the Early 1980s?

Have conventional monetary policy instruments maintained the same ability to accommodate undesirable effects of shocks throughout the postwar period? Or has the changed economic environment characterizing the last 30 years diminished the sensitivity of macroeconomic volatility to systematic changes in the conduct of monetary policy? The answer is no to the first question and, consequently, yes to the second question. We estimate a medium‐scale New‐Keynesian model in two subsamples, 1955–79 and 1984–2012, and find that the sensitivity of inflation variance to changes in conventional monetary policy has declined. We document that the changed properties of the labour market largely contributed to this decline.     

The real effects of inflation in a developing economy with external debt and sovereign risk

In this paper we develop an intertemporal optimizing model to examine the real effects of inflation induced by monetary policy in an open developing economy with external debt and sovereign risk. The economy faces an upward sloping supply curve of debt. In our model, households require real balances in advance for consumption expenditures, and monetary policy involves targeting the inflation rate. We show that an increase in the inflation rate leads to a decrease in the stock of foreign debt. It also leads to a decrease in consumption, employment, capital accumulation and output in the long run. Our results show that the accumulation of foreign debt exhibits non-monotonic adjustment. Particularly, an increase in the inflation rate leads to a current account surplus followed by a deficit. Along with this non-monotonicity, our model also explains the positive correlation between savings and investment during the transitional periods (Feldstein–Horioka puzzle).     

Product Market Competition,Monetary Policy Regimes and Inflation Dynamics: Evidence from a Panel of OECD Countries

We empirically analyze the impact of product market competition on the responsiveness of inflation to macroeconomic imbalances. If competition is high the response of inflation to lagged inflation, unemployment and import prices is reduced, while inflation is more responsive to changes in productivity growth in countries in which competition is above the OECD average. Given the (‘good luck’) macroeconomic trajectories of the 1990s–2000s, the structural reforms that made goods markets more competitive improved the ability of OECD economies to smooth (dis)inflationary shocks, while changes in the monetary policy framework had a modest role in taming inflation during the Great Moderation.     

Inferring Policy Objectives from Economic Outcomes*

Estimated policy rules are reduced‐form equations that are silent on many important policy questions. However, a structural understanding of monetary policy can be obtained by estimating a policymaker's objective function. The paper derives conditions under which the parameters in a policymaker's policy objective function can be identified and estimated. We apply these conditions to a New Keynesian sticky‐price model of the US economy. The results show that the implicit inflation target and the relative weight placed on interest rate smoothing both declined when Paul Volcker was appointed Federal Reserve chairman.     

The small open macroeconomy and the yield curve: A state-space representation

This study extends a state-space representation of the yield curve and the macroeconomy to a small open economy in order to study the dynamic interaction between the yield curves in Canada and the U.S. The framework treats the U.S. term structure of interest rates as being exogenous to both the Canadian yield curve and macroeconomy. The empirical results support very strong links between the yield curves in the two countries, with the U.S. yield curve accounting for as much as 45 per cent of the variation of the movement in the level and about 30 per cent of the movements in the slope and the curvature of the Canadian yield curve. Canadian yield-curve factors are found to account for about 50 per cent of the variation in output and the monetary policy rate, and about 25 per cent of the variation in inflation, much larger than the yield curve effects found for future developments of the macroeconomies of other countries. A relatively strong bilateral relationship is found to exist between the yield curve and the instrument of monetary policy, supporting recent studies that find the dynamic relationship between the yield curve and the macroeconomy is due to the pivotal role that monetary policy plays in the macroeconomy.