Asset price boom-burst cycle as an elastic money response to technological shocks

Through a finite-lived dynamic stochastic general equilibrium (DSGE) model comprising bubbly capital with fixed supply, one-period gestation lag, and a cash-in-advance constraint, we show that a money-accommodated but not price-accommodated technological shock can trigger excessive movement in the asset price even in a flexible-price and frictionless environment.     

Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq

This paper theoretically investigates optimal monetary policy regime for oil producing developing countries. We analyze credibility and reputation of the Central Bank and macroeconomic dynamics under alternative monetary policy regimes. We construct a detailed and realistic model that can be used to analyze macroecomic structure and expectation dynamics of an oil producing open economy. We take into account the asymmetric information between the public and the central bank and theoretically investigate how this asymmetric information impacts the real economy and the credibility of the central bank. The simulation results indicate that central bank achieves higher credibility and lower inflation under dollarization and higher output levels under currency board regime. The model constructed in this paper has many policy implications for oil producing open economies. Using the implications of the model, we make monetary policy regime recommendations for post-war Iraq.     

Economic policy uncertainty,financial markets and probability of US recessions

We use probit recession forecasting models to assess the ability of economic policy uncertainty indexes developed by Baker et al. (2013) to predict future US recessions. The model specifications include policy indexes on their own, and in combination with financial variables, such as interest rate spreads, stock returns and stock market volatility. Both in-sample and out-of-sample analysis suggests that the policy uncertainty indexes are statistically and economically significant in forecasting recessions at the horizons beyond five quarters. The index based on newspaper reports emerges as the best predictor, outperforming the term spread at the longer forecast horizons.     

Budget deficits and inflation feedback

This paper reinterprets the mixed evidence of the relationship between budget deficits and inflation in high inflation economies. The main finding is that recurrent outbursts of extreme inflation in these economies can be explained by a certain hysteresis effect associated with public finance. This interpretation meets the evidence that dramatic shifts between regimes of moderately high and extremely high (hyper-) inflation often occur without visible deterioration in public finance or abrupt shifts in fiscal or monetary policies. The existence of this hysteresis effect is explicitly explained by the action of two mechanisms: the arithmetic associated with the wrong side of the inflation tax Laffer curve and the Patinkin effect (the reverse of the much oftener cited Olivera-Tanzi effect). It is also shown that the division of the operational budget deficit into the part that is subject to negative inflation feedback and the part that is inflation-proof has implications for both the discussion of the inflationary consequences of budget deficits and the design of stabilization policy.     

Does total-factor productivity drive housing prices? A growth-accounting exercise for four countries

Housing prices diverge from construction prices after 1997 in four major countries. Besides, total-factor productivity (TFP) differences between construction and the general economy account for the evolution of construction prices in the US and Germany, but not in the UK and Spain.     

Habit formation in state-dependent pricing models: Implications for the dynamics of output and prices

This paper examines the role of habit formation in a standard state-dependent pricing (SDP) model. Incorporating habit formation helps the SDP model to generate hump-shaped and more persistent output responses under a monetary shock. More importantly, incorporating habit formation causes dramatic changes in firm-level pricing behaviors and, as a result, the aggregate price index.     

Money as an Institution of Capitalism: Some Notes on a Monetary Theory of Uncertainty

Dillard notes that to consider money as an institution of capitalism means to emphasize that money is an essential element in explaining fluctuations in income and employment. He states that Keynes's liquidity preference theory offers a sound explanation of money as an institution of capitalism. Keynes's explanation is based on a necessary condition, independent of money: the presence of uncertainty. The objective of the paper is to elaborate a different explanation of the role of money, based on Keynes's 1933 and 1937–39 works, according to which the presence of money constitutes the necessary condition to justify the importance of uncertainty.     

Euler equations and monetary policy

Euler equations are the key link between monetary policy and the real economy in NK models. Under separable preferences, they fail to match interest rates. Non-separability between leisure and consumption significantly improves their fit and reliability for studying monetary policy.     

Unique monetary equilibria with interest rate rules: An extension

In a recent paper, Adão et al. (2011), using a cash-in-advance framework, derive an interest rate rule that results in a unique monetary equilibrium. The resulting interest rate rule is forward looking and the interest rate responds positively to forecasts of future real activity and to forecasts of the future price level. This paper extends their approach to a transactions cost environment. The resulting interest rate rule has the added feature that, in line with previous studies, the nominal interest rate responds positively to forecasts of future inflation.     

Introduction to monetary policy and capital accumulation

The papers in this symposium address the issue of multiple equilibria that can be induced by monetary policy in models with capital accumulation. In particular they examine how the “Taylor Principle”, under which interest rates respond more than proportionately to increases in inflation, can generate multiple equilibria. They also explore the design of policies to avoid the problem of multiple equilibria and indeterminacy.     

The composition of government spending and the multiplier at the zero lower bound

We investigate the size of the multiplier at the ZLB in a New Keynesian model. It ranges from around −0.25 to +1.5, depending on the extent to which the government spending is productive, substitutable or not for private consumption.     

A small estimated euro area model with rational expectations and nominal rigidities

We estimate a small model of the euro area to be used for evaluating alternative monetary policy strategies. Starting with the relationship between output and inflation we compare the fit of the nominal wage contracting model due to Taylor (J. Political Econom. 88 (1980) 1) and the relative real wage contracting model proposed by Buiter and Jewitt (The Manchester School 49 (1981) 211; reprinted in Buiter (Ed.), Macroeconomic Theory and Stabilization Policy, Manchester University Press, Manchester, 1989) and estimated with U.S. data by Fuhrer and Moore (Quart. J. Econom. 110 (1995) 127). While Fuhrer and Moore reject nominal contracts in favor of relative contracts, which induce more inflation persistence, we find that both specifications fit euro area data reasonably well. When considering France, Germany and Italy separately, however, we find that nominal contracts fit German data better, while the relative contracting model does well with respect to formerly high inflation countries such as France and Italy. We close the model by estimating an aggregate demand relationship and investigate the implications of nominal versus relative contracts for the inflation-output variability tradeoff when monetary policy follows Taylor's rule.     

The reliability of real-time estimates of the euro area output gap

This paper provides evidence on the reliability of euro area real-time output gap estimates. A genuine real-time data set for the euro area is used, including vintages of several sets of euro area output gap estimates available from 1999 to 2010. It turns out that real-time estimates of the output gap tend to be characterised by a high degree of uncertainty, much higher than that resulting from model and estimation uncertainty only. In particular, the evidence indicates that both the magnitude and the sign of the real-time estimates of the euro area output gap are very uncertain. The uncertainty is mostly due to parameter instability and model uncertainty, while data revisions seem to play a minor role. Some euro area real-time measures, based on multivariate components models and capacity utilisation, are relatively less uncertain, but do not appear to be fully reliable along some dimensions. To benchmark our results, we repeat the analysis for the US over the same sample. It turns out that US real-time estimates tend to be revised to a lesser extent than euro area estimates. However, euro area real-time output gap estimates tend to display a higher correlation with the final estimates and the sign of the level of US real-time estimates tends to be revised more often compared to the corresponding euro area estimates. In addition, the data revision component of the revision error is larger for US estimates than for the euro area. Overall, the unreliability in real-time of the US output gap measures detected in earlier studies is confirmed in the more recent period.     

The effects of government spending shocks on consumption under optimal stabilization

Economic theory has yet to come up with a general guidance regarding the dynamic effects and welfare implications of shocks to public spending. With the aim to provide a theoretical benchmark, we analyse if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard New Keynesian setting augmented for the presence of liquidity-constrained agents and non-separable preferences. Our results provide little evidence in support of a crowding-in effect under ‘timelessly optimal’ policy.     

Data uncertainty and the role of money as an information variable for monetary policy

In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices, and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyze the information content of money in a forward-looking model in which monetary policy is optimally determined subject to incomplete information about the true state of the economy. We show that monetary aggregates may have substantial information content in an environment with high variability of output measurement errors, low variability of money demand shocks, and a strong contemporaneous linkage between money demand and real output. As a practical matter, however, we conclude that money has fairly limited information content as an indicator of contemporaneous aggregate demand in the euro area.     

An overlapping-generations model with search

Search is embedded in an overlapping-generations model. The young participate in a centralized market, and then are matched in pairs in a decentralized market. The old only participate in the centralized market. If the buyer's bargaining power in pairwise trade is close to unity and if the old are risk averse, then the golden-rule rate of money transfer is positive. Such risk aversion, the pairwise meetings, and dependence of the young's saving on the rate of return are necessary for this result.     

The effect of GNP announcements on fluctuations of GNP growth

This paper is an empirical study of the degree in which perceptions affect the evolution of the economy. We study the effects of the announcements that the government makes on GNP growth. These announcements are subject to a substantial degree of noise and its accuracy improves with time. A revised number is published several years after the first announcement was made public. We consider that the final revision is the “true” value of GNP growth. We show that once announcements are taken into account, the true value of GNP growth at time t has no predictive power in determining growth at any future time. All the predictive power lies in the announcements, and not in the true level of growth. Actually, we show that the variable that determines future growth is the unexpected part of the announcements. We also show that announcements affect growth via aggregate investment.     

Supply side inflation persistence

We explore the role of the cost channel in accounting for inflation persistence in the New Keynesian model with Calvo pricing. Hump-shaped responses of inflation to monetary shocks are obtained under purely nominal rigidities.