TURNPIKE PROPERTIES OF A MONEY‐IN‐THE‐UTILITY‐FUNCTION MODEL*

This study establishes the global stability of a long‐run stationary state in a money‐in‐the‐utility‐function model. The major finding is that the constant money supply rule results in a stable allocation and price system if consumers discount their future utilities sufficiently weakly. Nominal and real interest rates will be in the neighbourhood of the inverse of the consumers’ discount factor β^‐1.     

ENDOGENOUS TIME PREFERENCE,INTEREST‐RATE RULES,AND INDETERMINACY*

This paper extends the Benhabib et al. flexible‐price, money‐in‐the‐utility‐function model by considering endogenous time preference and re‐examines equilibrium indeterminacy in response to alternative interest‐rate rules. We show that either an active or a passive interest‐rate feedback rule can generate local indeterminacy even if consumption and real money balances are Edgeworth independent. This result is in sharp contrast to that in the related literature. We also find that in the presence of endogenous time preference, local indeterminacy may occur regardless of whether the monetary policy is based on the interest‐rate feedback rule or money growth‐rate targeting.     

USE OF THE MONEY SUPPLY IN THE CONDUCT OF JAPAN'S MONETARY POLICY: RE‐EXAMINING THE TIME‐SERIES EVIDENCE*

This paper re‐examines whether the money supply (M2 + CDs) can predict future economic activity in Japan, using recent data to the end of 2003. I find that the linkage between M2 and income or prices has largely disappeared since the late 1990s. Evidence suggests that (i) time deposit behaviour is primarily responsible for the breakdown in the M2–income relationship; (ii) bank loans also lost their predictive content in the late 1990s; and (iii) there has been a close link between time deposits and bank loans. Non‐performing loans problems and ongoing restructuring may be root causes of these findings.     

DISCOUNT RATE FOR PUBLIC INVESTMENT IN A MONETARY DISEQUILIBRIUM ECONOMY*

In this paper, we explore the social rate of discount for public investment in a monetary overlapping generations model which allows for market disequilibria arising from price and wage rigidities. Financing public investment with a lump-sum tax on the younger generation, borrowing and money supply, the government maximizes the sum of generational utilities discounted by a social rate of time preference. For the social welfare optimum, it is required to take the boundary-maintaining policy by making demand for output equal to supply. In a stationary state, we show that (i) the social rate of discount on the Keynesian-repressed inflation boundary should be the weighted average of the social rate of time preference and the market rate of interest, the weights depending on the amount of private investment crowded out by public investment, and (ii) on the Keynesian-classical boundary it should be a modified version of the weighted average rule, containing an extra term which represents the marginal opportunity cost of public investment through its impact on labour employment.     

UK INFLATION: PERSISTENCE, SEASONALITY AND MONETARY POLICY

In the light of the changes to UK monetary policy since the early 1980s, we study the existence and nature of changes in the properties of retail price inflation over this period. A feature of our analysis is the attention paid to the marked seasonal pattern of monthly UK inflation. After taking account of seasonality, both univariate and Phillips curve models provide strong evidence of changes in the level and persistence of inflation around the end of 1992, at the time of the introduction of inflation targeting. Indeed, all models point to the effective disappearance of inflation persistence after this date, implying that constant-parameter models estimated using both pre- and post-inflation targeting data periods should be treated with considerable caution.     

MACROECONOMIC AND REDISTRIBUTIONAL EFFECTS OF CONSUMPTION TAXES IN THE USA*

This paper studies the effect of an increase in consumption taxes using a dynamic general equilibrium model of overlapping generations calibrated to the US economy. When the proceeds are used to reduce income taxes, the reform raises the aggregate capital and labour supply in the long run. Workers increase labour supply immediately in response to the reform, while consumption rises only gradually. The tax reform also transfers wealth from old consumers to young consumers. As a result, while future generations experience significant welfare gains, current generations, particularly old consumers, tend to experience sizable welfare losses. When the proceeds are used for a lump‐sum transfer, the aggregate capital and labour both decrease in the long run. This reform is welfare‐improving for the current low‐income households.     

IDEAL AND REAL JAPANESE MONETARY POLICY: A COMPARATIVE ANALYSIS OF ACTUAL AND OPTIMAL POLICY MEASURES*

This paper discusses the successes and failures of Japanese monetary policy by evaluating policies from January 1980 to May 2003 in the light of optimal policy rules. First, we quantitatively conceptualize the Bank of Japan (BOJ)'s policy decisions by employing Bernanke and Mihov's (1998 ) econometric methodology for developing monetary policy measures and term the resulting policy measure the ‘actual policy measure’. Next, assuming that the BOJ is committed to optimal policy rules, we simulate optimal policy paths, which we term ‘optimal policy measures’. We evaluate Japanese monetary policy historically by comparing actual and optimal policy measures.     

SECTOR‐SPECIFIC EXTERNALITIES AND STATUS PREFERENCES IN THE UZAWA‐LUCAS MODEL*

This paper shows that introducing preferences for social status based on human capital holdings modifies the finding of Gómez (2004 ) that sector‐specific externalities associated with human capital in the goods sector do not violate the optimality of the competitive economy in the Uzawa–Lucas model. The effect of an increase in the degree of sector‐specific externalities is qualitatively the same as that of an increase in the strength of the desire for status. Hence, paradoxically, a greater degree of sector‐specific externalities makes human capital accumulation more excessive from the social point of view.     

AN ANALYSIS OF MONETARY POLICY SHOCKS IN JAPAN: A FACTOR AUGMENTED VECTOR AUTOREGRESSIVE APPROACH*

This paper analyses monetary policy shocks in Japan using a factor augmented vector autoregressive approach. There are three main findings. First, the time lags with which the monetary policy shocks are transmitted vary between the various macroeconomic time series. These include several series that have not been included thus far in standard vector autoregressive analysis, including housing starts and employment indices. Second, a coherent picture of monetary policy effects on the economy is obtained. Third, it is found that monetary policy shocks have a stronger impact on real variables, such as employment and housing starts, than industrial production.     

THE EFFECTIVENESS OF NON‐TRADITIONAL MONETARY POLICY MEASURES: THE CASE OF THE BANK OF JAPAN*

This paper summarizes non‐traditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last 2 decades and by other G7 central banks since the start of the current global financial turmoil and analyses the effectiveness of such measures. The paper begins with a typology of policies usable near the zero lower bound on interest rates. They are: (i) forward guidance of future policy rates; (ii) targeted asset purchases; and (iii) quantitative easing. Using this typology, I review the measures adopted by the BOJ and other central banks. I then offer a news analysis of the effects of the measures adopted by the BOJ on asset prices, comparing them with those adopted by the Fed. Many of the measures, with the exception of strategy (iii), are shown to have moved asset prices in the expected directions. Another exception is that most of the monetary easing measures failed to weaken the yen. Despite some effects on asset prices, however, the measures have failed to stop the deflationary trend of the Japanese economy clearly. I discuss some possible reasons for this and more general implications for monetary policy.     

SOCIAL STATUS,EDUCATION AND GOVERNMENT SPENDING IN A TWO‐SECTOR MODEL OF ENDOGENOUS GROWTH*

This paper extends the relative wealth specification of status preference to the two‐sector Uzawa (1965 )– Lucas (1988 ) model and examines the effectiveness of government spending on economic growth. It is found that the desire for relative wealth‐induced social status and/or the education component of relative wealth‐induced social status are important ingredients in determining the growth rate effects of government spending. Provided that the agent is concerned with his or her relative social position, the education‐induced social status plays a more important role than the physical‐asset‐induced social status in determining the validity of public spending on growth. If individuals do not care about their education‐driven social rewards, then an increase in government spending has no effect on the balanced growth rate regardless of the presence of the physical‐asset‐induced social status. A rise in government spending reduces the long‐run growth rate if the education‐induced social status is present.     

MULTIPLIER EFFECTS OF PUBLIC SERVICES IN A TWO‐SECTOR MODEL OF MONOPOLISTIC COMPETITION

In a two‐sector model of monopolistic competition, this paper explores what impacts an expansion of government spending on public services has on national income. In the short run where entry and exit of firms are restricted, a rise in government spending on services like health care (which has only a role of substituting for market services) increases national income, but that on services like elderly care (which has not only this role but also another role of contributing to home production of services) decreases it. These results are reversed in the long run. Welfare effects of public services are also examined.     

Optimal price‐level drift under commitment in the canonical New Keynesian model

Abstract In both the canonical and many extended versions of the New Keynesian model, optimal monetary policy under commitment implies price‐level stationarity as long as expectations are rational. We show that this is no longer the case if the central bank and private agents make decisions before observing current shocks. The optimal amount of price‐level drift in response to unexpected innovations to inflation is quantitatively important. This result has important implications for monetary policy, including the design of the optimal loss function for the central bank if it cannot commit to its future policies.     

INFLATION AND THE PUBLIC DEFICIT WHEN THE UTILITY OF MONEY IS INSATIABLE*

When the marginal utility of money is positive even at very high levels of the asset (Yoshiyasu Ono's, 1994, assumption), the relationship between inflation and the public deficit at full employment may result in a unique perverse equilibrium where higher deficits reduce inflation. If there are two equilibria, the low inflation equilibrium is one where the perverse effect between inflation and the public deficit prevails; while in the high inflation equilibrium higher public deficits increase inflation. These results contrast sharply with traditional results found in the literature.     

MONETARY AND FISCAL POLICY EFFICIENCY AND COORDINATION IN A MULTI‐SECTOR OPEN‐ECONOMY GENERAL EQUILIBRIUM MODEL

The paper analyzes monetary and fiscal stabilization and coordination in a multi‐sector stochastic new open economy macroeconomics (NOEM) model. It first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative welfare effects of an unanticipated productivity shock affecting some or all of the sectors in each country. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on the welfare performance of monetary policy. The setup also allows for international asymmetry concerning the uncertainty over the shocks. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible‐price equilibrium. However, their welfare performance is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks.     

EQUILIBRIUM GROWTH IN A MONETARY ECONOMY WITH TRANSACTIONS COSTS*

The paper describes a dynamic general equilibrium monetary economy with technological primitives that are consistent with the possibility of asymptotic equilibrium growth. The paper focuses on the relationship between equilibrium financing constraints on investment goods, transaction costs and economic growth. A generalized growth condition is derived that involves both monetary growth rates and transaction costs. The condition is used to show that (i) although inflation taxes can potentially exert a negative influence on long-run economic growth, these growth effects cannot in general be arbitrarily large; and (ii) for some monetary growth rates, money is superneutral in contrast to the models of Stockman and Abel. Numerical work indicates that although the welfare and growth effects of decreasing nominal interest rates from a benchmark are large, the costs associated with raising nominal interest rates from benchmark are not.     

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.     

FIRST‐BEST FISCAL POLICY WITH SOCIAL STATUS*

This paper examines the first‐best fiscal policy in a stochastic, infinite‐horizon representative agent model that exhibits consumption‐enhanced as well as wealth‐enhanced social status in the household utility. We show that the first‐best labour tax rate is a positive constant that is used to correct negative consumption externalities. The first‐best tax rate on capital income is also positive in order to overturn agents' status‐seeking capital over‐accumulation. Moreover, we find that in sharp contrast to a conventional automatic stabilizer, the first‐best capital tax rate moves in the opposite direction with shocks to firms' production technology, thus exacerbating the business cycle.     

Crowding out and crowding in: When does redistribution improve risk-sharing in limited commitment economies?

When the risk of default constrains financial contracts, public insurance policies can significantly affect private risk-sharing. This is because by changing income expectations and volatility, redistribution changes the attractiveness of default and thus endogenous borrowing constraints. Extending results by Krueger and Perri (2011) [8], this paper analyses the conditions under which redistribution can improve private insurance by making default less attractive to the income-rich, whose income it reduces. I first explain why public redistribution typically crowds out private insurance in the two-income economy, and identify the role of income persistence and saving after default. Second, I show how, in endowment economies with three income states or more and in economies with capital, redistributive taxes can improve, or “crowd in”, private consumption insurance. Finally, in a quantitative exercise using a realistic income process calibrated to US micro-data, moderate redistribution crowds in private insurance with production but not in an endowment economy.     

A REVISIT TO THE STATIONARITY OF OECD INFLATION: EVIDENCE FROM PANEL UNIT‐ROOT TESTS AND THE COVARIATE POINT OPTIMAL TEST*

This paper re‐examines the stationarity of inflation rates in 19 Organisation for Economic Cooperation and Development countries with the use of cross‐sectional information. We employ the panel unit‐root tests that allow for cross‐sectional dependency and the covariate point optimal test. These tests have high power in common due to the exploitation of cross‐sectional information, and they can assist mutually to draw a concrete conclusion on inflation dynamics for all series in the panel. Our empirical results show that allowing for cross‐sectional dependency rejects the null hypothesis that all series in the panel have a unit root, implying that there is at least one stationary series in the panel. With the help of the results of the covariate test, we can distinguish the panel into a group of stationary and a group of non‐stationary series. For robustness, the two groups of series are re‐confirmed by the panel tests. Our results reveal evidence of mean reversion in inflation for 15 of 19 countries, which is significantly stronger as compared to that obtained by the state‐of‐the‐art univariate unit‐root tests.