A quantitative exploration of the opportunistic approach to disinflation

Under a conventional policy rule, a central bank adjusts its policy rate linearly according to the gap between inflation and its target, and the gap between output and its potential. Under “the opportunistic approach to disinflation” a central bank controls inflation aggressively when inflation is far from its target, but concentrates more on output stabilization when inflation is close to its target, allowing supply shocks and unforeseen fluctuations in aggregate demand to move inflation within a certain band. We use stochastic simulations of a small-scale rational expectations model to contrast the behavior of output and inflation under opportunistic and linear rules.     

The Value of Interest Rate Stabilization Policies When Agents Are Learning

We examine the expectational stability (E-stability) of rational expectations equilibrium in the "New Keynesian" model where monetary policy is optimally derived and interest rate stabilization is added to the central bank's traditional objectives of inflation and output stabilization. We consider both the case where the central bank lacks a commitment technology and the case of full commitment. We show that for both cases, optimal policy rules yield rational expectations equilibria that are E-stable for a wide range of empirically plausible parameter values. These findings stand in contrast to Evans and Honkapohja's findings for optimal monetary policy rules in environments where interest rate stabilization is not a central bank objective.     

Inflation targeting: What inflation rate to target?

In an economy with nominal rigidities in both an intermediate good sector and a finished good sector, and thus with a natural distinction between CPI and PPI inflation rates, a benevolent central bank faces a tradeoff between stabilizing the two measures of inflation, a final output gap and, unique to our model, a real marginal cost gap in the intermediate sector, so that optimal monetary policy is second-best. We discuss how to implement the optimal policy with minimal information requirement and evaluate the robustness of these simple rules when the central bank may not know the exact sources of shocks or nominal rigidities. A main finding is that a simple hybrid rule under which the short-term interest rate responds to CPI inflation and PPI inflation results in a welfare level close to the optimum, whereas policy rules that ignore PPI inflation or PPI sector shocks can result in significant welfare losses.     

Notes on the Underground: Monetary Policy in Resource‐Rich Economies

The central bank of a commodity‐exporting small open economy faces the traditional trade‐off between domestic inflation and output gap. The commodity sector introduces a terms‐of‐trade inefficiency that gives rise to an endogenous cost‐push shock, changes the target level for output, reduces the slope of the Phillips curve, and increases the importance of stabilizing the output gap. Optimal monetary policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation raises interest rates to limit the inflationary impact of an exchange rate depreciation.     

Flexible inflation targeting and financial stability: Is it enough to stabilize inflation and output?

We investigate empirically whether a central bank can promote financial stability by stabilizing inflation and output, and whether additional stabilization of asset prices and credit growth would enhance financial stability in particular. We employ an econometric model of the Norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth, in addition to inflation and output. We find that output stabilization tends to improve financial stability. Additional stabilization of house prices, equity prices and/or credit growth enhances stability in both inflation and output, but has mixed effects on financial stability. In general, financial stability as measured by e.g., asset price volatility improves, while financial stability measured by indicators that depend directly on interest rates deteriorates, mainly because of higher interest rate volatility owing to a more active monetary policy.     

Demographics,Monetary Policy,and the Zero Lower Bound

We develop a New Keynesian life-cycle model to assess the importance of population aging for monetary policy. The model successfully matches the age profiles of consumption-savings decisions made by European households. It implies that demographic trends contribute significantly to the decline of the natural rate of interest (NRI) and potential output growth, and exacerbate the risk of hitting the zero lower bound (ZLB), given the current inflation targets. Under a realistic assumption that the central bank updates its estimates of the NRI only with some lag, aging may additionally lead to a sizable and persistent deflationary bias, elevating the ZLB risk even further.     

Monetary policy transmission in vector autoregressions: A new approach using central bank communication

In this paper, we study the role played by central bank communication in monetary policy transmission. We employ the Swiss Economic Institute’s Monetary Policy Communicator to measure the future stance of the European Central Bank’s monetary policy. Our results indicate, first, that communication has an influence on inflation (expectations) similar to that of actual target rate changes. Communication also plays a noticeable role in the transmission of monetary policy to output. Consequently, future work on monetary policy transmission should incorporate both a short-term interest rate and a communication indicator. A second finding is that the monetary policy transmission mechanism changed during the financial crisis as the overall effect of monetary policy on (expected) inflation and output is weaker and of shorter duration during this period compared to the overall sample period.     

Optimal monetary policy under low trend inflation

In the monetary policy literature it is common to assume that trend inflation is zero, despite overwhelming evidence that zero inflation is neither empirically relevant nor a practical objective for central bank policy. We therefore extend the standard New Keynesian model to allow for positive trend inflation, showing that even low trend inflation has strong effects on optimal monetary policy and the dynamics of inflation, output and interest rates. Under discretion, the efficient policy deteriorates and there is no guarantee of determinacy. Even with commitment, targeting non-zero trend inflation leads to substantial welfare losses. Our results serve as a warning against indiscriminate use of models assuming zero trend inflation.     

利率政策环境与央行货币政策选择

央行的货币政策实施受货币政策环境制约,特别是实施价格型货币政策时,在不同的利率环境下央行可能选择不同的利率调控模式。为此,通过构建门限回归模型对货币政策调控模式与利率区制的相依性进行实证检验,结果发现：在不同的利率区制内中央银行的政策偏好和利率调控模式存在显著差异。在高利率区制,中央银行存在针对产出缺口调整名义利率的政策偏好;在低利率区制,中央银行则不存在这种政策偏好,低利率环境下货币政策效应弱化甚至失效是导致此区制中央银行不针对产出缺口调整利率的主要原因。     

Money supply announcements and interest rates: Does monetary policy matter?

Most current explanations of the effect of money supply announcements on the rate of interest center on central bank policy. This paper analyzes a flexible price macroeconomic model where present and future monetary policy have no influence on either interest rates or real output, but monetary data signal information about real economic activity which influences both short- and long-term real rates of interest. The magnitude of the interest rate response is shown to depend on the difference in the income elasticities of currency and deposit demand and the relative size of monetary and real disturbances to the economy.     

Estimating DSGE models with zero interest rate policy

We propose estimating DSGE models in which the central bank fixes the policy rate for an extended period of time and apply our approach to estimate expected durations of the Federal Reserve’s zero interest rate policy since 2009. We find a large increase in expected duration in 2011 with the move to calendar-based guidance and a decrease in 2013 with the ‘Taper tantrum’. These changes are identified by the influence of expected duration on output, inflation and interest rates at longer maturities. The structural model measures the severity of the zero lower bound constraint and the effects of unconventional policy.     

U.S. Monetary Regimes and Optimal Monetary Policy in the Euro Area

Monetary policy in the United States has been documented to have switched from reacting weakly to inflation fluctuations during the 1970s, to fighting inflation aggressively from the early 1980s onward. In this paper, I analyze the impact of the U.S. monetary policy regime switches on the Eurozone. I construct a New Keynesian two‐country model where foreign (U.S.) monetary policy switches regimes over time. I estimate the model for the U.S. and the Euro Area using quarterly data and find that the United States has switched between those two regimes, in line with existing evidence. I show that foreign regime switches affect home (Eurozone) inflation and output volatility and their responses to shocks, substantially, as long as the home central bank commits to a time‐invariant interest rate rule reacting to domestic conditions only. Optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer‐price inflation and to international variables, such as imported goods relative prices. In fact, I show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally. Interestingly, I show that only marginal gains arise for the Euro Area when the European Central Bank (ECB) adjusts its policy according to the monetary regime in the United States. Thus, a simple time‐invariant monetary policy rule with a strong reaction to Producer Price Index (PPI) inflation and relative prices is enough to counteract the effects of monetary policy switches in the United States.     

Using a long-term interest rate as the monetary policy instrument

Using a short-term interest rate as the monetary policy instrument can be problematic near its zero bound constraint. An alternative strategy is to use a long-term interest rate as the policy instrument. We find when Taylor-type policy rules are used by the central bank to set the long rate in a standard New Keynesian model, indeterminacy—that is, multiple rational expectations equilibria—may often result. However, a policy rule with a long-rate policy instrument that responds in a “forward-looking” fashion to inflation expectations can avoid the problem of indeterminacy.     

Monetary policy when potential output is uncertain: Understanding the growth gamble of the 1990s

The Fed kept interest rates low and essentially unchanged during the late 1990s despite a booming economy and record-low unemployment. These interest rates were accommodative by historical standards. Nonetheless, inflation remained low. How did the Fed succeed in sustaining rapid economic growth without fueling inflation and inflationary expectations? In retrospect, it is evident that the productive capacity of the economy increased. Yet as events unfolded, there was uncertainty about the expansion of the capacity of the economy and therefore about the sustainability of the Fed's policy.This paper provides an explanation for the success of the Fed in accommodating growth with stable inflation in the late 1990s. It shows that if the central bank is committed to reverse policy errors it makes because of unwarranted optimism, inflation can remain in check even if the central bank keeps interest rates low because of this optimism. In particular, a price level target—which is a simple way to model a commitment to offset errors—can serve to anchor inflation even if the public does not share the central bank's optimism about shifts in potential output. The paper shows that price level targeting is superior to inflation targeting in a wide range of situations. The paper also provides econometric evidence that, in contrast to earlier periods, the Fed has recently put substantial weight on the price level in setting interest rates. Moreover, it shows that CPI announcement surprises lead to reversion in the price level. Finally, it provides textual evidence that Alan Greenspan puts relatively more weight on the price level than inflation.     

Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique

Woodford argues that it is not appropriate to regard inflation in the steady state of New Keynesian models as determined by steady‐state money growth. Woodford instead argues that the intercept term in the monetary authority's interest rate policy rule determines steady‐state inflation. In this paper, I offer an alternative interpretation of steady‐state behavior, according to which it is appropriate to regard steady‐state inflation as determined by steady‐state money growth. The argument relies on traditional interpretations of the central bank's power in the long run and appeals to model properties that are common to textbook and New Keynesian analysis. According to this argument, the only way the central bank can control interest rates in the long run is via affecting inflation, and its only means available for determining inflation is by determining the money growth rate.     

Are Indexed Bonds Really Inflation Proof? A Model of Real and Nominal Term Structures when Money has Real Effects

This paper studies the general behavior of the nominal and real term structures of interest rates in a general equilibrium framework. A central bank is introduced in the model as an agent facing a tradeoff between inflation and output and choosing a monetary policy variable. Prices and output are jointly determined in our model endogenously. Two multi-factor nominal and real term structure models are given as examples to illustrate the general model. In our economies, inflation indexed bonds are not completely inflation proof, but are still subject to the influence of inflation uncertainties. The models offer us an empirical framework that can be studied with indexed bond data and nominal bond data together in a single estimation.     

A happy “half way-house”? Medium term inflation targeting in New Zealand

The 2002 Policy Targets Agreement (PTA) between the government and central bank of New Zealand asks the central bank to target inflation “over the medium term” rather than over an annual target. Delegating such a medium term objective to the central bank shifts inflation targeting towards a “halfway-house” between inflation targeting and price level targeting. We show empirically that this helps time consistent policy approximate the first-best commitment policy even when the government asks the central bank to weight output stabilisation differently to society. We estimate the New Zealand economy with a small open economy DSGE model and show that the happiest halfway house is located around a two year averaging horizon at most, which leads to mild improvements in monetary policy efficiency.     

新凯因斯DSGE模型与货币政策法则之汇率动态分析

对于小型开放经济而言,当经济存在价格僵硬的情况下,中央银行在面对不同冲击发生时,各政策法则执行对汇率波动的影响及动态调整过程差异较大。从中国台湾地区的情况为案例来看,在稳定汇率波动方面:当国内技术冲击时,货币法则优于利率法则;当国外通货膨胀时,利率法则优于货币法则;当国外利率冲击时,执行利率法则或货币法则,其结果无显著差异。在汇率动态调整方面:当国外利率调升时,中央银行执行利率法则与货币法则下,汇率的瞬时反应为过度贬值;当国外物价膨胀时,执行利率法则与货币法则下,汇率的瞬时反应表现为立即升值;当国内技术进步冲击时,因为国外冲击对小型开放经济体系影响力道较强,使得国内技术进度对体系的影响相对较小,其中在利率法则下,汇率微幅贬值,而在货币法则下,汇率微幅升值。     

Changing Monetary Policy Rules, Learning, and Real Exchange Rate Dynamics

When the exchange rate is priced by uncovered interest parity and central banks set nominal interest rates according to a reaction function such as the Taylor rule, the real exchange rate will be determined by expected inflation and the output gap or the unemployment gap of the home and foreign countries. This paper examines the implications of these Taylor rule fundamentals for real exchange rate determination. Because the true parameters in central bank policy rules are unknown to the public and change over time, the model is presented in the context of a least squares learning environment. This simple learning model captures the volatility and the major swings in the real deutschemark/euro–dollar exchange rate from 1976 to 2007.     

Monetary policy, taxes, and the business cycle

This paper analyzes the interaction of inflation with the tax code and its contribution to aggregate fluctuations. We find significant effects operating through the tax on realized nominal capital gains. A tax on nominal bond income magnifies these effects. Our innovation is to combine monetary policy shocks with non-indexed taxes in a model where the central bank implements policy using an interest rate rule. Monetary policy had important effects on the behavior of the business cycle before 1980 because policymakers did not exert effective control over inflation. Monetary policy reform around 1980 led to better control, and with more stable inflation, the effect of the interaction between monetary policy and the nominal capital gains tax has become negligible.