Private information, money, and growth: Indeterminacy, fluctuations, and the Mundell-Tobin effect

We introduce an informational asymmetry into an otherwise standard monetary growth model and examine its implications for the determinacy of equilibrium, for endogenous economic volatility, and for the relationship between steady-state output and the rate of money growth. Some empirical evidence suggests that, for economies with low initial inflation rates, permanent increases in the money growth rate raise long-run output levels. This relationship is reversed for economies with high initial inflation rates. Our model predicts this pattern. Moreover, in economies with high enough rates of inflation, credit rationing emerges, monetary equilibria become indeterminate, and endogenous economic volatility arises.     

Friedman meets Becker and Mulligan in a monetary neoclassical growth model

We study a neoclassical growth model with the time preference determined by resources spent on imagining future pleasures along the line of Becker and Mulligan (Q J Econ 112:729–758, 1997). We introduce money into the economy via a cash-in-advance constraint and study the effect of higher seignorage taxes or higher monetary growth rates on capital, consumption and welfare in the long run. We find that if the fraction of investment constrained by cash is smaller than a threshold, the negative-monetary-growth Friedman (The Optimum Quantity of Money and Other Essays, 1969) rule does not hold and the optimal inflation rate is positive. Calibrating our model yields a mild optimal inflation rate per annum with a switch from zero inflation to optimal inflation creating a sizable welfare gain in terms of consumption equivalence.     

Inflation volatility,economic growth and monetary policy in Bangladesh

This article provides an overview of the trends and movements of CPI-inflation in Bangladesh since the early 1950s and examines the key issues in rule-based monetary policy for price stability, implying low and stable inflation, in this country. Under a fixed exchange rate system, inflation in Bangladesh was moderately high and volatile during the 1950s and 1960s. Since the country’s independence from Pakistan in 1971, inflation in Bangladesh has remained moderately high on average and highly volatile and persistent under a fixed-pegged exchange rate system or under a managed floating system since 2003. Using data from the early 1970s or earlier depending on data availability, the article undertakes both Granger-causality and the structural vector autoregression (SVAR) analysis with two models. The first model is comprised of such variables as inflation, the real interest rate, the real exchange rate and output growth, and the second model is comprised of the volatilities of money growth, real output growth and inflation. Then, based on the empirical findings, the article concludes that a rule-based monetary policy, namely monetary targeting or inflation targeting, remains appropriate for Bangladesh provided that it adopts a more flexible, if not freely floating, exchange rate system. The article suggests that the use of monetary policy to achieve multiple objectives under a fixed-pegged exchange rate system creates a time-inconsistency problem, reduces monetary policy credibility and makes it (monetary policy) ineffective in lowering inflation and its volatility. Low credibility of monetary policy in particular raises inflation persistence. Within the present monetary-policy framework in Bangladesh, the article illustrates how the fixed-pegged exchange rate system has generated money growth volatility in the presence of large-scale inflows of overseas workers’ remittances and readymade garments export earnings. This does not seem to be a concern of the central bank of Bangladesh (Bangladesh Bank); rather, it (Bangladesh Bank) pursues monetary-base targeting to keep inflation low and stable after considering economic growth. The consequent diminishing credibility of monetary policy has kept inflation volatile and persistent, which has adversely affected economic growth.     

Inflation contract,central bank transparency and model uncertainty

Using a New-Keynesian model subject to misspecifications, we examine how the robust monetary policy could be modified by a linear inflation contract when a central bank is opaque about its preference for model robustness. It is shown that a central bank must limit this preference and opacity about it to ensure the dynamic stability of the economy. An optimal inflation contract with a zero penalty rate provides no incentive for a central bank to be opaque. The latter must rebalance the benefit of avoiding very bad outcomes in worst case scenarios and the economic costs due to higher macroeconomic volatility.     

Unveiling the objectives of central banks: Tales of four Latin American countries

We estimate the stabilization objectives of four Latin American countries that have implemented a flexible inflation targeting regime recently: Brazil, Chile, Colombia and Peru. In doing so, we develop a New Keynesian dynamic stochastic general equilibrium model for these economies and estimate their structural parameters through Bayesian methods. To infer the stabilization objectives in each country, we assume that central banks set monetary policy optimally. Our main results highlight that the central banks in these four countries have a high preference for stabilizing inflation, but do not have the systematic objective of stabilizing the exchange rate. This result is robust to assuming either commitment or discretion in the optimal policy. Also, in contrast to the case of commitment, assuming discretion in the optimal monetary policy increases the preference for interest rate smoothing, making it comparable to a preference for inflation stabilization. Finally, except for the case of Peru, the monetary policy under discretion has a better empirical fit in these countries than the one under commitment.     

Fiscal and monetary effects on environmental quality,growth, and welfare

This paper examines the effect of fiscal and monetary policies on economic growth, inflation, environmental quality, and welfare. To this end, the horizontal-R&D growth model is extended to include pollution generated in the intermediate-goods production, and the demand for money through cash-in-advance (CIA) constraints on intermediate-goods production and R&D investment. Fiscal policy embodied in the taxation of pollution decreases output, profits, inflation, and wages in the intermediate-goods sector, reallocating labor to R&D that is the engine of economic growth. As it reduces pollution, it increases welfare if there are strong preferences for a clean environment. In turn, since the inflation rate is an increasing function of the nominal interest rate, the effects of changes in this monetary policy variable extend to the effects of changes in the inflation rate. An increase in the nominal interest rate penalizes employment, wages and output in the R&D sector relatively more if the respective CIA constraint is more demanding and thus economic growth decreases. As it also reduces pollution since decreases intermediate-goods production, it increases welfare if the preferences for a clean environment are strong enough.     

Financial market imperfections and monetary policy strategy

In a model with imperfect money, credit and reserve markets, we examine if an inflation-targeting central bank applying the funds rate operating procedure to indirectly control market interest rates also needs a monetary aggregate as policy instrument. We show that if private agents use information extracted from money and financial markets to form inflation expectations and if interest rate pass-through is incomplete, the central bank can use a narrow monetary aggregate and the discount interest rate as independent and complementary policy instruments to reinforce the credibility of its announcements and the role of inflation target as a nominal anchor for inflation expectations. This study shows how a monetary policy strategy combining inflation targeting and monetary targeting can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. Friedman's k-percent money growth rule, which can generate dynamic instability, and two alternative stabilizing feedback monetary targeting rules are examined.     

Monetary Policy in Russia: Identifying exchange rate shocks

Russian monetary policy has failed persistently to achieve sustained low inflation, both in absolute terms and relative to the peer group of countries similarly exiting from Soviet-style central planning. This paper explores the reasons for this state of affairs by analysing the kind of monetary policy that has been pursued by the central bank during the period 1995 to 2009. Our contribution is to search for a possible transmission channel between the real interest rate, inflation rate, exchange rate, output growth and foreign reserve growth, after having controlled for the effect of oil price inflation. Using a vector autoregressive model in error-correction form and using sign restrictions methodology, we show that the monetary authorities’ failure to abate double-digit inflation appears to be driven by the policy of exchange rate targeting, as reflected in our identified exchange rate shocks.     

Wealth in utility,the Taylor principle and determinacy

Wealth in the utility function leads to the discounting to consumer’s Euler equation, enlarging determinacy regions and making it easier for the monetary authority to ensure equilibrium determinacy. We show that a passive policy rule which adjusts nominal interest rate by less than one-for-one in response to the inflation rate is able to rule out equilibrium indeterminacy, if properly specified, due to the presence of the demand channel of the Taylor principle and equilibrium determinacy. Furthermore, the extent to which monetary policy rule can be passive in order to avoid indeterminacy depends critically on the degree of preference over wealth as well as the underlying structures and parameters of the model.     

预期管理理论的形成、演变与启示

本文从货币政策视角梳理了预期管理理论的形成与演变历程,探讨了对通胀预期管理的现实启示。本文研究发现,预期管理理论以货币政策可信度为核心,历经从规则与相机抉择之间的摇摆到融合政策承诺与中央银行沟通并形成前瞻性引导的过程,各种预期管理思想的引入均通过对货币政策施加各种约束,促进政策的动态一致性,提高公众预期形成的精确性。构建以新凯恩斯主义DSGE模型为基础的预期管理框架,改进以预期形成机制和金融体系的模型化为代表的模型结构,采用机制设计方法完善货币政策框架成为未来预期管理理论发展的重要方向。对于我国而言,加快以利率与汇率市场化改革为代表的金融改革,强化以价格稳定为核心的货币政策调控,并通过有效权衡稳增长、调结构与反通胀之间关系,塑造坚定的反通胀立场,形成以通胀目标为代表的名义锚。同时构造兼顾价格稳定与金融稳定的宏观审慎管理框架和中国特色的新凯恩斯主义DSGE模型,提高预期管理的可信度。     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

中国GDP增长与CPI:关系、均衡与“十二五”预期目标调控

通货膨胀率和经济增长率之间动态关系的认识是宏观调控的基础,然而,目前在线性和静态的分析框架内未能揭示出通货膨胀和经济增长的复杂动态关系。本文运用1996—2009年GDP增长率、CPI与M2增长率的季度数据建立我国经济增长与通货膨胀的非线性动力系统模型(GDP-CPINLDS),揭示了我国最优的季度GDP增长率和CPI,以及零通货膨胀的季度GDP增长率。总体上,我国经济增长与通货膨胀处在次优化的非均衡运行状态,两者呈现出同向性变动的特点。最优调控实验表明,仅调节M2增长率不能完全实现"十二五"调控目标。文章建议"十二五"期间要以调控GDP增长为导向,以从紧货币政策为基础,配合多种调控手段,形成强有力的联合调控机制,以确保GDP增长率和CPI目标的最优实现。     

Liquidity risk, economic development, and the effects of monetary policy

Empirical evidence indicates that monetary policy is not super-neutral in many countries. In particular, in high inflation economies, inflation is negatively related to economic activity. By comparison, inflation may be positively correlated with output in low inflation countries. We present a neoclassical growth model with money in which the incidence of liquidity risk is inversely related to aggregate capital formation. Interestingly, there may be multiple monetary steady-states where the effects of monetary policy vary. In poor economies, the financial system is highly distorted and higher rates of money growth are associated with less capital formation. In contrast, in advanced economies, a Tobin effect is observed. Since inflation exacerbates distortions from a coordination failure in the low-capital steady-state, individuals become much more exposed to liquidity risk. Consequently, optimal monetary policy depends on the level of development.     

Inflation aversion and macroeconomic policy in a perfect foresight monetary model

This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing inflation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.     

Monetary integration and inflation preferences: A real options analysis

We use a two-country model where policymakers minimize Barro-Gordon-type loss functions over inflation, and inflation preferences follow geometric Brownian motions, to characterize and solve the optimal stopping problem describing a given country's decision of whether or not to pursue monetary integration with the other one, and derive the conditions under which monetary integration can, or will never, be an equilibrium outcome in our economy. We then carry out comparative statics analysis on the bounds characterizing these conditions and on the range of relative inflation preference parameters that support monetary integration in equilibrium, and illustrate with numerical examples.     

Estimating Central Banks’ preferences from a time-varying empirical reaction function

We estimate monetary policy reaction functions for the United States, the United Kingdom, and Germany, using a Markov-switching model that allows for shifts in the coefficients of the central bank's reaction function as well as for independent shifts in the residual variance. The results indicate that central bank policy can be characterized as falling into a low- and a high-inflation regime. Over time all central banks have assigned changing weights to inflation and the output gap. Switching in the residual variance turns out to be important for the fit of the model. As a reaction function is a reduced form, coefficients embody preference parameters as well as parameters characterizing the structure of the economy. To recover the central banks’ preferences, we estimate the preference parameters jointly with a small model of the economy. The results show that the Bundesbank has placed a relatively higher weight on inflation than the Fed. Moreover, for the Bundesbank and the Fed the differences between both regimes seem to originate mainly from a changing preference for interest rate smoothing.     

Post-stabilization inflation dynamics in Slovenia

This paper investigates the inflation process in Slovenia through an examination of some commonly used determinants of inflation in transition economies. Granger causality tests and an analysis of unrestricted VAR models suggest a strong linkage between both growth in broader monetary aggregates and changes in the tolar-deutsche mark exchange rate on retail price inflation. While the growth in wages affects inflation, it appears that both changes in the exchange rate and growth in monetary aggregates provide the initial impulse. A discussion of the present money-exchange rate policy framework and its influence on inflation is also provided.     

Robust monetary policy under model uncertainty and inflation persistence

In this paper, we examine the inflation persistence puzzle by applying the robust control approach of Hansen and Sargent (2008). In line with the literature suggesting that inflation persistence may be affected by the monetary policy design and its institutional characteristics, we find that inflation persistence is positively related to the central bank's preference for model robustness. In effect, model uncertainty and robust decision making may be considered as a mechanism generating inflation persistence, for a given non-zero degree of autocorrelation in supply-side shocks. Further, the policy implication is that the central bank's monetary policy under model uncertainty renders, in terms of the sacrifice ratio, the output-cost of inflation stabilization more important.     

Assessing the Impact of US Macroeconomic Policies and Inflation Rates on the Australian Economy*

A three-equation system is specified with Australian monetary base growth, the domestic budget deficit and the domestic inflation rate as dependent variables Lagged values of these three variables and their US counterparts are entered as explanatory variables in each equation. Results for 1967-83 suggest a possible effect of lagged US monetary base growth on Australian monetary base growth plus a positive direct impact of US inflation on Australian inflation.     

Money, Neutrality of Consumption Taxes, and Growth in Intertemporal Optimizing Models

This paper considers the effects of a proportional consumption tax with the same rate over time on the real growth path of a monetary economy. The analysis uses a variety of stylized monetary growth models in which the individual's consumption-saving decision is based on intertemporal utility maximization (e.g. the money-in-utility, transaction-costs, and cash-in-advance models). The neutrality of consumption taxation depends on the assumed role of money in the respective models, even though the tax revenue collected is fully rebated to consumers as lump-sum transfers. The consumption tax is generally superior to inflation tax (i.e. the rate of monetary growth) in terms of steady-state welfare, as long as the labour supply is fixed.
JEL Classification Numbers: E21, E41, E62, H24