Monetary and financial stability in the euro area: Pro-cyclicality versus trade-off

This paper investigates the nexus between monetary stability and financial stability. We examine, in the experience of EMU between 1994 and 2008, first, the response of the term structure of interest rates, share prices, exchange rates, property price inflation and the deposit–loan ratio of the banking sector (our proxies for financial stability) to changes in the consumer price level and ECB policy rate (our proxies for monetary stability); second, whether and to what extent lower inflation has caused share price stability and how ECB policy rate has reacted to inflation. Using a sign-restriction-based VAR approach, we find that there is a pro-cyclical relationship between monetary and financial stability in the long-run. With a positive inflation shock, we find on average a 2% estimated decline in share prices. This suggests that the interest rate instrument used for inflation targeting is conducive to financial stability.     

Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model

In this paper, we investigate existence of long-run equilibrium relationships among the aggregate stock price, industrial production, real exchange rate, interest rate, and inflation in the United States. Applying Johansen's cointegration analysis to monthly data for the 1974:01-1998:12 period, we find that the S&P 500 stock price is positively related to the industrial production but negatively to the real exchange rate, interest rate, and inflation. Analysis of error correction mechanism reveals that the stock price, industrial production, and inflation adjust to correct disequilibrium among the five variables, while variance decompositions indicate that the stock price is driven to a considerable extent by innovations in the interest rate. Structural stability tests show that the parameters of the cointegrating system and the error correction term are stationary.     

Adaptive-regressive expectations and the price level: A reformulation

In a recent paper, Frenkel (1975) presents an adaptive-regressive scheme of expectations as applied to the inflation rate. While the rationale for the scheme is the presence of expectations concerning the price level, Frenkel's construction does not specify such an expected price level, but only a short-run (instantaneous) and a long-run expected inflation rate. It is shown here that, even though such a specification yields reasonable results for certain important kind of policy changes, it is not robust enough so as to yield equally reasonable outcomes for other type of changes. This paper presents a specification of the expected price level (and, consequently, of all future expected inflation rates) which is not subject to those shortcomings and which seems to reflect in a better manner the basic economic idea behind the scheme.     

Menu costs and Markov inflation: A theoretical revision with new evidence

We revisit a foundational theoretical paper in the menu-cost literature, Sheshinski and Weiss [1983. Optimum pricing policy under stochastic inflation. Review of Economic Studies 50(3), 513-529], one of the few to treat stochastic inflation with persistent deviations from trend. In contrast to the original finding, we show that optimal pricing in this environment entails using different (s,S) bands in high-inflation and low-inflation states of the world. The low-inflation band is strictly contained within the high-inflation band. This revised solution has very different implications from the original one. Firms are generally risk loving, not risk averse, with respect to inflation. An increase in the variance of inflation increases price dispersion when inflation is high and decreases price dispersion when inflation is low. On an aggregate level, this optimal pricing would lead to bunching of prices and non-neutrality of money in the setting of Caplin and Spulber [1987. Menu costs and the neutrality of money. Quarterly Journal of Economics 102(4), 703-725]. To test the main finding, we construct an establishment-level dataset from the months surrounding Mexico's “tequila crisis” in 1995. In the high-inflation state, price increases are larger and establishments allow their prices to vary more widely around their respective long-run mean relative prices. Cross-establishment price dispersion is lower, but this result seems due to decreased establishment heterogeneity rather than narrower (s,S) bands. Overall, the evidence suggests that establishments employ wider (s,S) bands in the high-inflation state.     

欧洲中央银行货币政策绩效评价:1999～2005

欧洲中央银行(ECB)围绕价格稳定目标确立起其货币政策战略。自1999年EMU正式建立以来,ECB的这一战略是否取得了成功呢?本文采用1999￣2005年数据,首先借助HICP通胀率、通胀预期等指标分析ECB货币政策在控制短期和中长期通胀方面的成效;然后进一步分阶段描述ECB货币政策行为和通胀率等主要宏观指标的内在联系。本文认为欧元区近些年来的通胀率超标主要是负向供给冲击尤其是能源价格冲击的结果;从主要指标看,ECB的货币政策战略已经取得初步成功;但是欧元区未来经济走势将对ECB的货币政策提出更严峻的挑战。     

汇率目标制、货币目标制和通货膨胀目标制的比较及其在我国的应用的探讨

汇率目标制、货币目标制在各自的经济背景下都起到了稳定一国通货、稳定汇率从而稳定一国物价总水平、促进经济增长的作用。起始于20世纪80年代末期,通货膨胀目标制代替汇率目标制、货币目标制成为许多国家追逐长期价格稳定的一种货币政策新框架,在取得长期价格稳定和金融稳定上具有更多优点和灵活性。我国金融开放条件下货币政策调控面临国内货币需求不稳定,内部、外部经济不平衡,金融不平衡等问题,在货币目标制和汇率目标制难以实现货币政策有效调控的情况下,建议应对我国的货币政策调控方式做出调整,采用通货膨胀目标制的货币政策框架。     

Search and matching frictions and optimal monetary policy

A recent literature has merged the New Keynesian and the search and matching frameworks, which has allowed the former to analyze the joint dynamics of unemployment and inflation. This paper analyzes optimal monetary policy in this kind of hybrid framework. I show that zero inflation is optimal when all wages are Nash bargained in every period and the economy's steady state is efficient. In the more realistic case in which nominal wage bargaining is staggered, a case against price stability arises: in response to real shocks, the central bank should use price inflation so as to avoid excessive unemployment volatility and excessive dispersion in hiring rates. For a plausible calibration, the welfare loss under the zero inflation policy is about three times as large as under the optimal policy.     

Monetary policy for inattentive economies

We offer a contribution to the analysis of optimal monetary policy. We begin with a critical assessment of the existing literature, arguing that most work is based on implausible models of inflation-output dynamics. We then suggest that this problem may be solved with some recent behavioral models, which assume that price setters are slow to incorporate macroeconomic information into the prices they set. A specific such model is developed and used to derive optimal policy. In response to shocks to productivity and aggregate demand, optimal policy is price level targeting. Base drift in the price level, which is implicit in the inflation targeting regimes currently used in many central banks, is not desirable in this model. When shocks to desired markups are added, optimal policy is flexible targeting of the price level. That is, the central bank should allow the price level to deviate from its target for a while in response to these supply shocks, but it should eventually return the price level to its target path. Optimal policy can also be described as an elastic price standard: the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate.     

Optimal Monetary Policy with Labor Market Frictions: The Role of the Wage Channel

This paper introduces right‐to‐manage bargaining into a labor search model with sticky prices instead of standard efficient bargaining and examines the Ramsey‐optimal monetary policy. Without real wage rigidity, even when the steady state is inefficient, price stability is nearly optimal in response to technology or government shocks. Right‐to‐manage bargaining creates the wage channel to inflation, because there is a direct relationship between real wages and real marginal cost. In the presence of the wage channel, price markups consist of only real marginal cost, and real wages and hours per worker are determined such as in the Walrasian labor market.     

Price impact and portfolio impact

We study survival, price impact, and portfolio impact in heterogeneous economies. We show that, under the equilibrium risk-neutral measure, long-run price impact is in fact equivalent to survival, whereas long-run portfolio impact is equivalent to survival under an agent-specific, wealth-forward measure. These results allow us to show that price impact and portfolio impact are two independent concepts: a nonsurviving agent with no long-run price impact can have a significant long-run impact on other agents' optimal portfolios.     

Optimal monetary policy in a small open economy with staggered wage and price contracts

We study optimal monetary policy for a small open economy in a model where both domestic prices and wages are sticky due to staggered contracts. The simultaneous presence of the two forms of nominal rigidities introduces an additional trade-off between domestic inflation and the output gap. We derive a second-order approximation to the average welfare losses that can be expressed in terms of the unconditional variances of the output gap, domestic price inflation, and wage inflation. As a consequence, the optimal policy seeks to minimize a weighted average of these variances. We analyze welfare implications of several alternative simple policy rules, and find that domestic price inflation targeting generates relatively large welfare losses, whereas CPI inflation targeting performs nearly as well as the optimal rule.     

Trend inflation, wage and price rigidities, and productivity growth

What are the steady-state implications of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts? Surprisingly, a benchmark calibration implies an optimal inflation rate of -1.9 percent. The analysis also shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steady-state output and welfare losses are quantitatively important even for low values of trend inflation. Further, nominal wage contracting is found to be quantitatively more important than nominal price contracting in generating the results. This conclusion does not arise from price dispersion per se, but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. Finally, accounting for productivity growth is found to be important for calculating the welfare costs of inflation. Indeed, the presence of 2 percent productivity growth increases the welfare costs of inflation in the benchmark specification by a factor of four relative to the no-growth case.     

The dynamics of economic growth,oil prices,stock market depth,and other macroeconomic variables: Evidence from the G-20 countries

This paper examines the linkages between economic growth, oil prices, depth in the stock market, and three other key macroeconomic indicators: real effective exchange rate, inflation rate, and real rate of interest. We employ a panel vector autoregressive model to test Granger causality for the G-20 countries over the period 1961–2012. A novel approach to this study is that we clearly demarcate the long-run and short-run relations between the economic variables. The results show a robust long-run economic relationship between economic growth, oil prices, stock market depth, real effective exchange rate, inflation rate, and real rate of interest. In the long run, real economic growth is found to respond to any deviation in the long-run equilibrium relationship that is found to exist between the different measures of stock market depth, oil prices, and the other macroeconomic variables. In the short run we find a complex network of causal relationships between the variables. While the empirical evidence of short-run causality is mixed, there is clear evidence that real economic growth responds to various measures of stock market depth, allowing for real oil price movements and changes in the real effective exchange rate, inflation rate, and real rate of interest.     

Ramsey monetary policy with labor market frictions

Traditional New Keynesian models prescribe that optimal monetary policy should aim at price stability. In the absence of a labor market frictions, the monetary authority faces no unemployment/inflation trade-off. The design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market. Optimal policy features deviations from price stability in response to both productivity and government expenditure shocks. When the Hosios [1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279-298] condition is not met, search externalities make the flexible price allocation unfeasible. Optimal deviations from price stability increase with workers’ bargaining power, as firms incentives to post vacancies fall and unemployment fluctuates above the Pareto efficient one.     

Stock returns,inflation and interest rates in the United Kingdom

The Fisherian theory of interest asserts that a fully perceived change in inflation would be reflected in nominal interest rates and stock returns in the same direction in the long run. This paper examines the Fisherian hypothesis of asset returns using alternative techniques of linear regression, and vector error correction models to examine the nature of the relationship between stock returns and inflation in the UK. Consistent with the Fisherian hypothesis, empirical evidence in the linear regression model suggests a positive and statistically significant relationship between stock returns and inflation, which regards common stock as a good hedge against inflation. The results based on the unit root and cointegration tests indicate a long-run reliable relationship between price levels, share prices, and interest rates which could be interpreted as the long-run determinants of stock returns. The findings also suggest a bidirectional relationship between stock returns and inflation. The evidence of a significant Fisher effect is robust across model specifications.     

The Long-Run Elasticity of New Housing Supply in the United States: Empirical Evidence for 1950 to 1994

The long-run price elasticity for alternative specifications of new housing supply is estimated using U.S. annual data for 1950 through 1994. The basic model expresses residential construction as a linear function of new housing price and the prices of construction inputs. Long-run elasticities range from 1.6 to 3.7, suggesting that new housing supply is price elastic. Residential construction responds to both the real interest and expected inflation rates, but other construction cost variables perform poorly. However, the results are sensitive to the time-series processes underlying the variables. A modified model that expresses residential construction as a function of changes in input prices, rather than their levels, produces a long-run elasticity of about 0.8 and a significant inverse relationship between new housing supply and the construction wage rate.     

Relationship between inflation and relative price variability in India

The paper attempts to investigate the relationship between relative price variability (RPV) and aggregate inflation rate through parametric and semi-parametric methods (kernel regression method). Monthly data of wholesale price index is used for the period from February 1995 to March 2014 for this purpose. Both the parametric and semi-parametric methods lead us to the non-monotonic relationship between RPV and inflation. An attempt has also been made to determine the optimal inflation rate that would minimize RPV.     

Monetary Policy in a Low‐Inflation Environment: Developing a State‐Contingent Price‐Level Target

A number of academic studies find that either price‐level targeting or temporary above‐average inflation are nearly optimal policies to address a liquidity trap crisis. Still, central bankers and the public generally question whether even a temporarily higher inflation rate could be beneficial in addressing a liquidity trap or could be consistent with price stability over the longer term. At the same time, however, the Federal Reserve's projections for high unemployment and low inflation do not seem to be consistent with the best monetary policies to address the Fed's dual mandate responsibilities. Accordingly, it is useful to seriously discuss these potentially beneficial alternative policies.     

The interrelationship between price and output decisions and investment decisions: Microfoundations and aggregate implications

This paper develops a model of firm behavior in which both price and output decisions and investment decisions are made. The model permits an analysis of the dynamics of inventory and capital accumulation on price and output behavior. There are two main results: (1) Short-run price and output levels will differ from long-run levels as desired stocks of inventory and capital diverge from actual levels. (2) The size of the elasticities of price and output to changes in demand and cost variables depends on the speed with which gaps between desired and actual stocks are closed through investment.     

Optimal inflation policy

This paper considers the problem of optimal long-run monetary policy. It shows that optimal inflation policy involves trading off two quite different considerations. First, increases in the rate of inflation tax the holding of many balances, leading to a deadweight loss as excessive resources are devoted to economizing on cash balances. Second, increases in the rate of inflation raise capital intensity. As long as the economy has a capital stock short of the golden rule level, increases in capital intensity raise the level of consumption. Ignoring the second consideration leads to the common recommendation that the money growth rate be set so that the nominal interest rate is zero. Taking it into account can lead to significant modifications in the ‘full liquidity rule’. Interactions of inflation policy with financial intermediation and taxation are also considered. The results taken together suggest that inflation can have important welfare effects, and that optimal inflation policy is an empirical question, which depends on the structure of the economy.