A classroom experiment in monetary policy

The authors propose a classroom experiment implementing a simple version of a New Keynesian model suitable for courses in intermediate macroeconomics and money and banking. Students play as either the central bank or members of the private sector. The central banker sets interest rates to meet twin objectives for inflation and the output gap or to meet only an inflation target. In both settings, private sector agents are concerned with correctly forecasting the inflation rate. The authors show that an experiment implementing this setup is feasible and yields results that enhance understanding of the New Keynesian model of monetary policy. They propose alternative versions where the central bank is replaced by a policy rule and provide suggestions for discussing the experimental results with students.     

Learning to Argue with Intermediate Macro Theory: A Semester-Long Team Writing Project

The authors describe their experience with integrating a semester-long economic analysis project into an intermediate macroeconomic theory course. Students work in teams of “economic advisors” to write a series of nested reports that analyze the current state of the economy, and propose and evaluate policies for a decision-maker. The project simulates real-world policy consulting with an emphasis on applying economic theory and models. The authors describe the project setup and how to tailor its theme to current events, explain methods for keeping it manageable in larger classes, discuss student learning outcomes, and document course evaluation results. Besides improving the learning experience, this project prepares economics students to contribute their own views to policy debates and buttress them with tight macroeconomic reasoning.     

中国上市公司商业信用 周期性变化的宏观经济动因研究

本文为了揭示中国上市公司商业信用周期性变化的宏观经济动因,构建了一个宏观经济因素影响上市公司商业信用行为的理论分析框架,从宏观和微观两个层面分析了宏观经济发展状况、货币政策和通货膨胀水平对中国上市公司商业信用周期性变化的影响机理。利用中国上市公司季度面板数据进行了实证检验。结果显示,随着货币政策宽松、宏观经济扩张和通货膨胀水平的增加,中国上市公司提供的商业信用净额都显著降低。这些研究结果折射出,当货币政策收紧或宏观经济收缩时,商业信用资金从上市公司部门流向非上市企业部门;反之,当货币政策过度宽松或宏观经济过度扩张时,上市公司部门通过商业信用渠道从非上市企业部门吸纳商业信用资金。     

Fiscal policy,macroeconomic performance and industry structure in a small open economy

We analyse how fiscal policy affects both the macroeconomy and the industry structure, using a multi-sector macroeconomic model of the Norwegian economy with an inflation targeting monetary policy. Our simulations show that the magnitude of the government spending and labour tax cut multipliers, whether monetary policy is active or passive, is comparable to what is found in the literature. A novel finding from our simulations is that the industry structure is substantially affected by an expansionary fiscal policy, as value added in the non-traded goods sector increases at the expense of value added in the traded goods sector. Moreover, expansionary fiscal policy reduces the mark-ups in the traded goods sector, while the mark-ups are roughly unchanged in the non-traded goods sector. The contraction of activity in the traded goods sector increases when monetary tightening accompanies the fiscal stimulus. Hence, we find that such a policy mix is likely to produce significant de-industrialization in a small open economy with inflation targeting.     

The cost of capital,asset prices,and the effects of monetary policy

The primary objective of this paper is to study the interaction between monetary policy, asset prices, and the cost of capital. In particular, we explore this issue in a setting where individuals face idiosyncratic risk. Incomplete information also provides a transactions role for money so that monetary policy can be studied. In contrast to standard monetary growth models which focus on the transmission of monetary policy to the demand for capital goods, we incorporate a separate capital goods sector so that the supply response to monetary policy is taken into account. Consequently, in contrast to the standard monetary growth model, monetary policy plays an important role in investment activity through the relative price of capital goods. Moreover, different sources of productivity can affect the degree of risk sharing. Although the optimal money growth rate falls in response to an increase in productivity in either sector of the economy, monetary policy should react more aggressively to the level of productivity in the capital sector.     

货币政策有效性与货币政策透明制度的兴起

本文着重探讨货币政策透明性与货币政策有效性之间的关系,目的在于说明货币政策透明制度能够兴起的一个关键因素在于货币政策的透明性有利于提高货币政策的有效性。在标准的“时间不一致性”理论里面,货币政策是否透明对货币政策的效应是没有影响的,因为在这类理论里面,经济主体能够使用所有可获得的信息形成与经济系统相一致的、无偏的估计。但问题的关键在于,这种假设的基本前提在实践中并不完全成立。当考虑到经济主体对经济运行结果和经济运行过程的不完全认知时,货币政策透明性对于促进经济主体的学习过程,稳定和引导公众的通胀预期,进而提高货币政策的有效性就起着至关重要的作用。     

Estimating the effects of forward guidance in rational expectations models

Simulations of forward guidance in rational expectations models should be assessed using the “modest policy interventions” framework introduced by Eric Leeper and Tao Zha. That is, the estimated effects of a policy intervention should be considered reliable only if that intervention is unlikely to trigger a revision in private sector beliefs about the way that monetary policy will be conducted. I show how to constrain simulations of forward guidance to ensure that they are regarded as modest policy interventions and illustrate the technique using a medium-scale DSGE model estimated on US data. I find that many experiments that generate the large responses of macroeconomic variables deemed implausible by many economists – the so-called “forward guidance puzzle” – are not modest policy interventions. Those experiments should therefore be treated with caution, since they may prompt agents to believe that there has been a change in the monetary policy regime that is not accounted for within the model. More reliable results can be obtained by constraining the experiment to be a modest policy intervention. In the cases I study, the quantitative effects on macroeconomic variables are more plausible when this constraint is imposed.     

Incentive Matters!—The Benefit of Reminding Students About Their Academic Standing in Introductory Economics Courses

In this article, the authors illustrate how incentives can improve student performance in introductory economics courses. They implemented a policy experiment in a large introductory economics class in which they reminded students who scored below an announced cutoff score on the midterm exam about the risk of failing the course. The authors employed a regression-discontinuity method to estimate the causal impact of their policy on students’ performance on the final exam. The results suggest that the policy had a significant impact on students’ performance on the final exam. In fact, the gain in test scores was sufficient to boost a student's overall course grade by one letter grade.     

Monetary policy in the BOF3 quarterly model of the Finnish economy

This paper describes the modelling of monetary policy in BOF3, a quarterly econometric model of Finland built at the Research Department of the Bank of Finland. BOF3 is a 198-equation, ‘amended Keynesian’ model which is used regularly in policy analysis and forecasting at the Bank. The modelling of the Finnish monetary sector has been complicated by the fact that most interest rates applied by the banks have so far been institutionally regulated. In spite of this, model builders have attempted to follow the conventional IS-LM approach as closely as possible, assuming that interest rates equilibrate financial markets outside the banking sector. The reported simulation experiments describe the effects of a change in nomical interest rates, of a change in the domestic money supply, and of a fiscal stimulus with and without monetary accomodation.     

An Interactive Microcomputer Program for Teaching the Impacts of Alternative Policy Sets in the Market for a Single Commodity

The authors describe a computer program in which students define alternative policy sets and compare their effects on the welfare of producers, consumers, and the public sector. A policy set may be a single tax or quota or a mix of taxes, subsidies, quotas, and/or price supports implemented at various points in the marketing chain.     

International monetary policy coordination in a new Keynesian model with NICE features

The authors provide a static two-country new Keynesian model to teach two related questions in international macroeconomics: the international transmission of unilateral monetary policy decisions and the gains coming from the coordination monetary rules. They concentrate on “normal times” and use a thoroughly graphical approach to analyze the questions at hand. In this setting monetary policy is conducted using interest rates rules and economic integration between nations does not necessarily create the case for the coordination of monetary policy. In particular, they show that the conduct of optimal national monetary policies does not make any difference with the coordination of national policies, as this creates a situation where the international monetary system operates “Near an International Cooperative Equilibrium” (NICE).     

United we stand: on the macroeconomics of a Fiscal union

In this paper, we apply dynamic tracking games to macroeconomic policy making in a monetary union. We use a small stylized nonlinear two-country macroeconomic model of a monetary union for analyzing the interactions between two fiscal (governments: “core” and “periphery”) and one monetary (central bank) policy makers, assuming different objective functions of these decision makers. Using the OPTGAME algorithm, we calculate numerical solutions for cooperative (Pareto optimal) and non-cooperative games (feedback Nash). We show how the policy makers react to adverse demand shocks. We investigate the consequences of three scenarios: decentralized fiscal policies controlled by independent governments (the present situation), centralized fiscal policy (a fiscal union) with an independent central bank (pure fiscal union), and a fully centralized monetary and fiscal union. For the latter two scenarios, we demonstrate the importance of different assumptions about the joint objective function corresponding to different weights for the two governments in the design of the common fiscal policy. We show that a fiscal union with weights corresponding to the number of states in each of the blocs gives better results than non-cooperative policy making. When one bloc dominates the fiscal union, decentralized policies yield lower overall losses than the pure fiscal union and the monetary and fiscal union.     

International capital flows,liquidity risk,and monetary policy

In recent years, there has been a large amount of lending coming from the public sector of many developing countries. At the same time, the financial sectors in many advanced countries have issued a large share of portfolio debt to other countries. What are the implications of these events for the global financial system and overall economic activity? Do they have an impact on the transmission channels of monetary policy across countries at different stages of economic development? We investigate these important issues using a micro-founded model of money and banking so that the effects of monetary policy across countries can be meaningfully studied. Notably, the increase in capital outflows to the advanced economy renders monetary policy in developing countries to be less effective, while the effects of monetary policy in advanced economies are more pronounced. Yet, our results indicate that it can indeed be optimal for lower income countries to lend to the advanced world. Importantly, we find that the optimal amount of lending to advanced countries critically depends on the degree of liquidity risk — if it is sufficiently high, then public sector lending to advanced economies is not warranted. Consequently, our results indicate that governments in developing countries should carefully consider how much capital they send abroad to foreign countries.     

结构性松动货币 抑制通货紧缩趋势

本文在充分肯定近年来我国实行稳健的货币政策所发挥的积极作用的同时 ,从短期政策操作的角度 ,运用实证资料 ,深入分析并阐明了自去年 9月份以来通缩趋势重新抬头的原因与机制 ,指出了在实际经济增长率低于潜在经济增长率的情况下 ,以低于潜在经济增长率的实际经济增长率作为货币政策操作的“准绳”和“依据” ,不利于充分运用我国富余的人力、物力和财力资源。在此基础上 ,作者提出了在稳健货币政策框架下 ,进一步结构性松动货币、抑制重新抬头的通货紧缩趋势的一系列政策建议     

A macroeconometric framework for monetary policy evaluation: A case study of Pakistan

This paper attempts to establish the quantitative importance of the various channels of monetary transmission by constructing, estimating and simulating a small macroeconometric model of Pakistan's monetary sector, while using data from the monetary statistics and the monetary survey of the State Bank of Pakistan over 1976–2007. The paper elucidates that the key feature of the study of monetary policy in Pakistan has been preoccupied with neglect either of the demand or the supply function of money and shows how this may lead to imprecise policy actions and mistaken conclusions. Accordingly, we delineate the transmission mechanism of monetary policy by taking into consideration all structural money demand and money supply linkages along with the historically implied identifying assumption in the framework of a marginalized macroeconometric model. The within-sample and out-of-sample evaluations of the model are found satisfactory. The paper presents results of three policy simulations from the estimated model that highlight the impact of alternative monetary policy instruments on the monetary variables under a rule-based and a discretionary policy environment. We find that (i) the SBP subscribes to an unannounced monetary policy rule, (ii) the determination of the policy rate under the announced rule environment stabilizes the monetary sector in that convergence to full equilibrium is smooth and rapid, (iii) a 100 bps reduction in the discount rate, ceteris paribus, decreases money supply by 4.97%, and (iv) the long term implication of reducing (increasing) the reserve requirement ratio on time (demand) deposits, ceteris paribus, is only higher inflation. Finally, we establish that a 100 bps increase in interest rate increases money supply by 3.14% in full equilibrium.     

The impact of monetary policy on housing market activity: An assessment using sign restrictions

Existing research demonstrates that housing, particularly residential investment, plays an important role in the transmission of monetary policy shocks to the overall economy. With this in mind, this paper investigates the relationship between monetary policy and housing market activity using a relatively new method for identifying monetary shocks. More specifically, a monetary policy shock is identified by explicitly imposing sign restrictions on impulse response vectors. The extra information from sign restrictions is important for new insights regarding the transmission of monetary policy to the housing sector – notably, the results indicate that residential investment is less sensitive to a contractionary shock than standard estimates with recursive restrictions. Given that the response of the housing sector using sign restrictions is smaller than other work using standard identification methods, the work indicates that further research is needed to examine whether other sectors of the economy may be less sensitive to monetary policy than previously thought.     

The Influence of Financial Factors on Corporate Investment

Abstract
Recent theoretical developments have shown that cash flows and the structure of a firm's balance sheet may have an important influence on investment. Establishing a link between cash flows, leverage and investment provides insights into the way that monetary policy and cyclical factors more generally influence the corporate sector. If cash flows are an important determinant of investment then changes in monetary policy (by changing interest rates) will influence investment through a cash flow effect as well as through altering the rate at which the returns to investment are discounted. If this is the case, the higher leverage of the corporate sector implies, other things being equal, that monetary policy may have a larger impact on investment than in the past .
In this article we use panel-data analysis to examine the impact of financial factors on investment decisions of firms in the Australian corporate sector. We find strong support for the influence of financial factors on investment decisions. Leverage, internally generated cash flows, and the stock of cash and liquid financial assets are all important influences on investment behaviour, particularly for smaller firms, highly leveraged firms, and firms with high retention ratios .     

Why has US monetary policy become ineffective lately?

Some recent studies show that US monetary policy has lost its stimulative traction, especially since the early 1980s. They argue that the Fed’s forward guidance has enabled economic agents to anticipate the changes in interest rates more accurately. As a result, it is harder to find truly exogenous monetary policy shocks, which has made monetary policy ineffective. In this article, we find that anomalous economic behaviours of financial institutions might be the true reason for the ineffective monetary policy. Our structural vector autoregressive model shows that increases in the US money supply mostly flowed into the financial sector to increase its profits instead of stimulating the real sector of the economy through business investment.     

What drives the short-run costs of fiscal consolidation? Evidence from OECD countries

We investigate how the short-term effects of fiscal consolidation on output and employment vary with the state of the business cycle, monetary policy, public debt, the current account, and private credit. By examining the response of a large number of variables, we are also able to shed light on the transmission channels of fiscal policy. Our main finding is that short-term output multipliers are below unity, even in states in which multipliers are expected to be larger (eg when the output gap is negative or monetary policy tight). Key offsetting factors that reduce the size of multipliers and explain differences across states are the extent to which the external sector improves and monetary policy eases.     

Can monetary policy stabilise food inflation? Evidence from advanced and emerging economies

This paper addresses a long-standing political debate as how effective is monetary policy to stabilise food inflation. While a wealth of theoretical literature suggests a stabilising role of monetary policy via aggregate demand channel, there exists hardly any empirical consensus on this issue. Very recently, a limited strand of empirical literature has attempted to shed light in this arena. The present study contributes to this literature by analysing the effectiveness of aggregate demand channel in presence of production cost channel of monetary policy transmission, affecting prices positively via supply side, in a panel of developed and emerging economies for the period 2006 Q1 to 2016 Q2. We find that an unexpected monetary tightening has a positive and significant effect on food inflation in both advanced and emerging economies. Our findings suggest that in the backdrop of inflationary pressure stemming from the food sector, a monetary tightening may turn out to be destabilising for the food as well as overall inflation in the economy.