Optimal monetary and fiscal policies in a search theoretic model of monetary exchange

Search models of monetary exchange commonly assume that terms of trade in anonymous markets are determined via Nash bargaining, which generally causes monetary equilibrium to be inefficient. Bargaining frictions add to the classical intertemporal distortion present in most monetary models, whereby agents work today to obtain cash that can be used only in future transactions. In this paper, we study the properties of optimal fiscal and monetary policy within the framework of Lagos and Wright (2005). We show that fiscal policy can be implemented to alleviate underproduction while money is still essential. If lump sum monetary transfers are available, a production subsidy can restore the efficiency of monetary equilibria. The Friedman rule belongs to the optimal policy set, but higher inflation rates are also possible. When lump-sum monetary transfers are not available, equilibrium allocations are generally not first-best. Nevertheless, fiscal policy still results in substantial welfare gains. Money can be extracted from circulation via a sales tax on decentralized market activities, and the Friedman rule is only optimal if the buyer has relatively low bargaining power.     

Optimal fiscal and monetary policies in the face of rare disasters

This paper studies optimal fiscal and monetary policies in an economy exposed to large adverse shocks (rare disasters). We contrast optimal policies under commitment and discretion and identify several striking differences between these institutional environments. A government that can commit to its policy plans relies heavily on debt to smooth the adverse effects of large shocks over time. Lack of commitment seriously limits the government's ability to use debt as a shock absorber. Under discretion, an increase in debt leads to an increase in inflation expectations and therefore higher nominal interest rate distortions. Hence, the discretionary government keeps debt in close vicinity of its steady-state level, and the response of taxes, inflation, and interest rates to shocks is much more pronounced under discretion than under commitment. This is particularly relevant for large shocks and when the initial stock of government debt is already high at the time the shock occurs. We also argue that the adverse welfare effects of disasters are larger under discretion than under commitment, but these welfare differentials can be significantly reduced by making the discretionary government inflation averse.     

Comment on “σ: The long and short of it”

I comment on some of the issues discussed by Robert Chirinko (Chirinko, R.S., 2008. σ: The long and short of it. Journal of Macroeconomics 30 (2), 671-686). I also offer some additional evidence and discuss the theoretical implications of the empirical findings regarding σ.     

The effectiveness of fiscal and monetary policy responses to twin crises

We study how effective fiscal and monetary policy responses are during a twin crisis. Using the dataset provided by Laeven and Valencia (2008 Laeven, L and Valencia, F. (2008) Systemic banking crises: a new database. IMF Working Paper No. 08/224 [Google Scholar]), we identify 57 episodes of twin crises. Following the methods proposed in Baldacci et al. (2009 Baldacci, E. 2009. Gupta, S. and Mulas-Granados, C., How effective is fiscal policy response in systemic banking crises?, IMF Working Paper No. 09/160 [Google Scholar]) and Hutchison et al. (2010 Hutchison, M. 2010. Noy, I. and Wang, L., Fiscal and monetary policies and the cost of sudden stops, Journal of International Money and Finance, 29, 973–87 [Google Scholar]), we construct the variables measuring the duration and output cost of a twin crisis. We find that fiscal policy does not seem to be associated with the shortening of a twin crisis. Regarding monetary policy, we find that monetary tightening is associated with the lengthening of a twin crisis duration, consistent with the result in Hutchison et al. (2010 Hutchison, M. 2010. Noy, I. and Wang, L., Fiscal and monetary policies and the cost of sudden stops, Journal of International Money and Finance, 29, 973–87 [Google Scholar]) dealing with a sudden stop crisis. In addition, our results show that while a mild monetary expansion is effective in reducing a twin crisis duration, over-expansionary monetary policy loses its effectiveness.     

The role of factor substitution in the theory of economic growth and income distribution: Two examples

While much empirical evidence suggests that the Cobb–Douglas production function may be a reasonable benchmark for aggregate analysis, we argue that the practice, particularly prevalent in contemporary growth theory, of adopting the Cobb–Douglas technology, may lead to misleading implications. Using two examples, we show that key implications of the models are highly sensitive to small deviations of the elasticity of substitution from unity. The first employs the standard neoclassical model and emphasizes the sensitivity of the speed of convergence to small changes in the elasticity of substitution. This in turn has profound consequences for wealth and income distribution. The second deals with foreign aid and highlights how the relative merits of “tied” versus “untied” aid are also very sensitive to the elasticity of substitution.     

The identification of fiscal and monetary policy in a structural VAR

Good economic management depends on understanding shocks from monetary policy, fiscal policy and other sources affecting the economy and their subsequent interactions. This paper presents a new methodology to disentangle such shocks in a structural VAR framework. The method combines identification via sign restrictions, cointegration and traditional exclusion restrictions within a system which explicitly models stationary and non-stationary variables and accounts for both permanent and temporary shocks. The usefulness of the approach is demonstrated on a small open economy where policy makers are actively considering the interaction between monetary and fiscal policies.     

Systemic risk: The coordination of macroprudential and monetary policies in China

The literature documents the effects of monetary and macroprudential policies in controlling systemic risk, but empirical evidence of a systemwide framework that effectively coordinates the two policies is lacking. This study assesses the effectiveness, channels, and timeliness of monetary and macroprudential policies’ impacts on systemic risk in China from January 2009 to June 2018, and contributes to the discussion of how to coordinate these policies. Using an index synthesized from 28 indicators to proxy China’s systemic risk, we find the following: (1) A contractionary monetary (macroprudential) shock increases (reduces) systemic risk over the entire shock time period. (2) Macroprudential (monetary) policy is effective in the long (short) term. (3) The systemic risk intervention effect of monetary (macroprudential) policy is channeled through inflation control (asset price stability).     

Rigid wage-setting and the effect of a supply shock,fiscal and monetary policies on Chinese economy by a CGE analysis

The purpose of this paper is to present a computable general equilibrium (CGE) model of the Chinese economy which includes rigid wage-setting and integration of real and financial sectors, and to apply it to a quantitative evaluation of the oil price changes and the fiscal and monetary policies. The policy simulation shows whether the wage rate is flexible or rigid is crucial for the evaluation of various policy measures. Furthermore, the fields of application of the model are extended from the industry-related problems to the macroscopic ones such as inflation, stabilization policies and so on.     

The interaction between monetary and fiscal policies in Turkey: An estimated New Keynesian DSGE model

This paper estimates a New Keynesian open economy DSGE model for Turkey by using Bayesian estimation technique for the period of 2002:q1–2009:q3. It studies fiscal and monetary policy interactions and their role in stabilisation of the economy using a small-scale model following the methodology outlined in Lubik and Schorfheide (2007). The general features of the model can be summarised as follows: Calvo style nominal price rigidities, perfect exchange rate pass-through, complete international asset markets, rule of thumb price setters and distortionary taxation.     

Climate-change adaptation: The role of fiscal policy

Climate change and natural disasters have important consequences on fiscal sustainability, especially for developing countries with limited financial resources and underdeveloped institutions. The paper contributes to shed light on the role of fiscal policy in climate-change adaptation, which aims at containing the economic damage of climate change. We use an overlapping generations (OLG) model for a small open economy in which adaptation reflects the extent to which public policies reduce the negative influence of climate change on the capital depreciation rate. Adaptation includes both preventive measures, i.e. investment in infrastructure, and remedial measures, i.e. post-disaster relief and reconstruction. Through model simulations we assess the costs and benefits of both remedial and preventive actions. We find that preventive intervention leads to higher GDP growth rates than either taking no action or waiting until remedial action is necessary. However, the evidence shows that, due to high costs of early adaptation and budgetary constraints, countries tend to focus on late corrective actions, also relying on international assistance. Given the expected increase in climate-related risks, a comprehensive strategy including both preventive and corrective actions would be desirable to strengthen resilience to shocks and alleviate the financial constraints, which particularly affect small countries.     

GHG mitigation schemes and energy policies: A model-based assessment for the Italian economy

We build up a large scale dynamic general equilibrium model embodying a cap on pollutant emissions, an electricity sector and fuel consumption to analyse climate-energy policies for the Italian economy. Our results show how the trade-off between environmental quality and economic activity can be effectively overcome by recycling the revenues from the sales of emission permits in labour tax reductions. A tax combination aimed at reducing the consumption of fossil fuel, while simultaneously decreasing taxes on labour, is expansionary, but the final outcome is influenced by the underlying GHG emission policy. Tax incentives encouraging the use of clean energy sources, by discouraging the use of fossil fuel, produce a sizeable reallocation of emissions across sectors and are found to be expansionary. Overall the paper highlights the non-trivial interactions between the different fiscal tools in hand to meet the legally binding commitment on emission reduction, while limiting the potential negative fallout on the economy.     

The effect of ECB monetary policies on interest rates and volumes

This article assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes or bond issuance for three types of different economic agents through five different markets: sovereign bonds at 6-month, 5-year and 10-year horizons, loans to nonfinancial corporations and housing loans to households, during the financial crisis, and for the four largest economies of the euro area. We look at three different unconventional tools: excess liquidity, longer-term refinancing operations and securities held for monetary policy purposes following the decomposition of the ECB’s Weekly Financial Statements. We first identify series of ECB policy shocks at the euro area aggregate level by removing the systematic component of each series and controlling for announcement effects. We second include these exogenous shocks in country-specific structural VAR, in which we control for credit demand. The main result is that only the pass-through from the ECB rate to interest rates has been effective. Unconventional policies have had uneven effects and primarily on interest rates.     

The nature and role of monetary policy when money is endogenous

This paper considers the nature and role of monetary policywhen money is modelled as credit money endogenously createdwithin the private sector. There are currently two schools ofthought that view money as endogenous: one has been labelledthe ‘new consensus’ in macroeconomics, and the otheris the Keynesian endogenous (bank) money approach. The paperfirst explores the analysis of monetary policy in the ‘newconsensus’ macroeconomic model, followed by an examinationof the effectiveness of monetary policy in that analysis. TheKeynesian view of endogenous money is discussed, and the rolefor monetary policy in a Keynesian endogenous monetary policyanalysis is considered, including discussion of the objectivesand instruments of monetary policy.     

The determinants of household recycling: social influence,public policies and environmental preferences

Our article aims at understanding the determinants of households’ selective waste-sorting behaviours, based on data from an original survey of 694 individuals in the French Provence–Alpes–Côte d’Azur region. The applied literature focuses mainly on countries with high recycling rates. We focus on a region with the lowest recycling rate in France, a country that recycles less than the European country average. We first apply polychoric principal components analysis to reduce the number of explanatory variables to a set of six factors. In a second step, we use a probit model to estimate the probability of waste sorting as a function of these factors. This model tests several hypotheses emerging from the recent literature on behavioural economics applied to households’ selective sorting. This literature pays particular attention to the social influence on recycling behaviour, which has been studied mostly by sociologists and psychologists. The results of our empirical analysis confirm some of the findings in the literature. However, they also highlight some unique features, such as social influences having a negative impact on recycling. This finding contrasts with most of the literature, which finds a positive relationship of social influence on pro-environmental behaviour.     

The relation of risk attitudes and other-regarding preferences: A within-subjects analysis

In this paper we provide experimental evidence on the relation of individual risk attitudes and subjects׳ aversion to favorable inequality. In a within-subjects design we expand Blanco et al.׳s (2011) modified dictator game by the risk-elicitation task of Eckel and Grossman (2002). Our data show strong support for a significant negative correlation between risk tolerance and an aversion to favorable inequality. The results are independent of gender, i.e., women and men show a similar correlation in these traits.     

Keynes's theory of liquidity preference and his debt management and monetary policies

This paper seeks to bolster the view that Keynes was a monetaryeconomist concerned primarily with monetary and not fiscal policy.His most fundamental policy conclusion for national economieswas that the authorities could control the long-term rate ofinterest and should do so to promote investment, growth andemployment. Keynes's theory of liquidity preference is presentedas a theory of money as a store of value that leads to thisfundamental policy conclusion. The theory is then applied toexplain the debt management, monetary and international financialpolicies that were adopted in World War II.     

Present bias and the inefficiency of the centralized economy: The role of the elasticity of intertemporal substitution

We analyze an endogenous growth model considering agents with an isoelastic utility. Preferences are characterized by a utility affected by a negative externality, and a level of impatience which decays with the time distance from the present. Agents who cannot commit the actions of their future selves, play a game against them. The stationary equilibrium of this game defines a balanced growth path with a slower growth when played by subsequent central planners than when played by decision makers in the market economy. First, we prove that the fast growing market economy implies higher welfare if the negative externality is small, while the centralized economy is welfare improving above a given threshold for the externality (obtained for a specific family of non-constant discount functions). Secondly, we observe that this threshold increases with the elasticity of intertemporal substitution in consumption. Therefore, the greater this elasticity the more likely it is that the externality lies below this threshold, where policy interventions would not be adequate. Finally, as one would expect, the range of values of the externality for which the market equilibrium provides higher welfare widens the more different from constant discounting time preferences are, due either to a wider range of variation for the instantaneous discount rates or because these decay more slowly.     

The geometry of distributional preferences and a non-parametric identification approach: The Equality Equivalence Test

This paper proposes a geometric delineation of distributional preference types and a non-parametric approach for their identification in a two-person context. It starts with a small set of assumptions on preferences and shows that this set (i) naturally results in a taxonomy of distributional archetypes that nests all empirically relevant types considered in previous work; and (ii) gives rise to a clean experimental identification procedure – the Equality Equivalence Test – that discriminates between archetypes according to core features of preferences rather than properties of specific modeling variants. As a by-product the test yields a two-dimensional index of preference intensity.     

The design of monetary and fiscal policy: A global perspective

We study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicities, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics.