Wealth effects, the Taylor rule and the liquidity trap

This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations à la Yaari–Blanchard–Weil. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, in the presence of wealth effects, the occurrence of liquidity traps is not avoided when the central bank implements a Taylor-type interest-rate feedback rule.     

Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy

Between 2002 and 2006, the Federal Reserve set interest rates significantly below the rates suggested by well-known monetary policy rules. There is a growing body of research suggesting that this helped fuel an excess of liquidity in the U.S. that contributed to the 2008 worldwide financial crash. It is less well known that a number of other central banks also lowered interest rates during this period. An important question, then, is what role the Federal Reserve played in influencing other central banks to alter their own monetary policies, which could have magnified the Fed’s actions in creating global liquidity. This paper addresses the issue by showing how spillovers in central bank behavior occur in theoretical rational expectations models. It then establishes empirically how U.S. monetary policy actions affect the actions of other major central banks, particularly in terms of interest rates and currency interventions. The models and data suggest that the U.S. lowering its policy rate, either in general or in reference to a monetary policy rule, influences other central banks to lower their own policy rates and intervene in currency markets, even when controlling for worldwide macroeconomic trends. It thus appears that U.S. actions were a factor in the worldwide lowering of interest rates and the increase in currency reserves in the early 2000s that may have contributed to the subsequent global liquidity boom.     

Thinking About the Liquidity Trap

The phenomenon of the liquidity trap—defined as a situation in which even a zero interest rate is insufficiently low to produce full employment—has taken on new importance with the persistent slump in Japan. This paper restates recent theoretical work on liquidity traps, drawing a link between “intertemporal” models that are mainly concerned with demonstrating the underlying logic, and more ad hoc models that bear directly on policy; it then reexamines policy alternatives, including fiscal stimulus and inflation targeting. J. Japan. Int. Econ., December 2000, 14(4), pp. 221–237. Woodrow Wilson School, Princeton University, Princeton, New Jersey 08544-1013 Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E52, E58, E31, F31.     

Why floating exchange rates fall: A reconsideration of the liquidity trap

In the international capital market, interest rates would seem to be natural shock absorbers for balancing currency risk associated with expected inflation or differential taxation. Under a floating exchange rate, however, short-term interest rates in each national money market behave as if caught in a liquidity trap. The problem arises because the domains for national monetary circulation remain somewhat disjoint even though the bond market is fully integrated internationally. The national rate of interest is ncapable of equilibriating the domestic money market on the one hand and the international bond market on the other. The result is excessively high exchange-rate volatility that distorts the flow of international commodity trade and causes cycles of inflation and deflation in open economies.     

Should We Be Afraid of Friedman's Rule?

Should one think of zero nominal interest rates as an undesirable liquidity trap or as the desirable Friedman rule? I use three different frameworks to discuss this issue. First, I restate H. L. Cole and N. Kocherlakota's (1998, Fed. Res. Bank Minn. Quart. Rev., Spring, 2–10) analysis of Friedman's rule: short run increases in the money stock—whether through issuing spending coupons, open market operations, or foreign exchange intervention—change nothing as long as the money stock shrinks in the long run. Second, two simple Keynesian models of the inflationary process with a zero lower bound on nomianl interest rates imply either that deflationary spirals should be common or that a policy close to the Friedman rule and thus some deflation is optimal. Finally, a formal baby-sitting coop model implies multiple equilibria, but does not support the injection of liquidity to restore the good equilibrium, in contrast to P. Krugman (1998, Slate, August 13). J. Japan. Int. Econ., December 2000, 14(4), pp. 261–303. CenER, Tilburg University; Humboldt University, Berlin, Germany; and CEPR Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E41, E50, E51, E52.     

U.S. Monetary Policy: A View from Macro Theory

We use a dynamic stochastic general equilibrium model to address two questions about U.S. monetary policy: 1) Can monetary policy elevate output when it is below potential? and 2) Is the zero lower bound a trap? The model’s answer to the first question is yes it can, but the effect is only temporary and probably not welfare enhancing. The answer to the second question is more complicated because it depends on policy. It also depends on whether it is the inflation rate or the real interest rate that will adjust over the longer run if the policy rate is held near zero for an extended period. We use the Fisher equation to analyze possible outcomes for situations where the central bank has promised to keep the interest rate near zero for an extended period.     

The liquidity trap: Japan, 1996–2001 versus the United States, 1933–1940

Keynes’ “liquidity trap” rarely occurs. But when it does, it has a tremendously adverse effect on the economy concerned. Such was the case of the United States in the 1930s and now that of contemporary Japan. In a liquidity trap, monetary policy pushes the money interest rate to the zero level while expanding the money supply (M1) at a faster rate than nominal GDP. Conventional theory explains this phenomenon as the result of money demand that becomes infinitely interest-elastic at the zero rate, rendering ineffective the rapidly expanding money supply established by the monetary authorities.In this paper, we show that the liquidity trap is a multifaceted phenomenon not limited to the money market. It involves the bank loan market, the bank deposit market, and the bond market interacting together. Of these, the most important is the bank loan market and the least important is the bank deposit market, whose deposit supply becomes horizontal at the zero rate. They are met by relatively interest-inelastic bank loan demand and bank deposit demand. Hence, the causality is completely reversed from the conventional understanding.We give empirical evidence in support of our theory based on data from the United States, 1933–1940 and Japan, 1996–2001. Far apart in time and space, the two cases are remarkably alike and, hence, provide strong supporting evidence.     

美国量化宽松政策对亚太新兴市场国家的影响

量化宽松是美联储在通货紧缩下所采取的一种直接创造货币、扩大央行资产负债表规模的非传统货币政策。量化宽松将给我国等新兴市场国家造成较大的负面效果,建议采取临时性资本管制、针对性量化政策、建立区域货币离岸市场、加快经济结构转型等对策来应对。     

Hot Money Flows,Commodity Price Cycles and Financial Repression in the USA and China： The Consequences of Near-zero US Interest Rates

Under near-zero US interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and domestic prices begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis＇. This cyclical inflation on the dollar＇s periphery only registers in the US core eonsumer price index with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic finaneial intermediation by banks and money market mutual funds is repressed. Because China is forced to keep its interest rates below market-clearing levels, it also suffers from finaneial repression, although in a form differing from that in the USA.     

The Zero Lower Bound on Nominal Interest Rates and Monetary Policy Effectiveness: a Survey

This paper surveys the literature on monetary policy at the zero lower bound on nominal interest rates. Certain crucial insights regarding expectations have been neglected in recent research in this field. Taking this into account, the interactions between demand, confidence and supply shocks appear crucial for hitting the zero lower bound and escaping from it. Restoring confidence can play a vital role in solving the zero lower bound problem, thereby avoiding a liquidity trap.     

Optimizing International Investment and Trade Under Golden Rule Conditions

In a two-country, two-factor world, each is assumed to choose a golden rule path, but these paths differ because of divergent growth rates for labor (in efficiency units). In order to maintain these, it becomes necessary to impose a tax on the return to foreign-owned capital equal to the difference between the lower foreign rate and the higher home rate of the capital-importing country. It is also necessary to prevent undercutting of this difference in capital returns via adjustment of domestic production, as in the HOLS theorem. This is done by means of a supporting tariff on trade. When foreign investment also involves the transfer of technology, the tax is accordingly reduced. It is also shown, using the calculus of variations, that if and only if social planners have a discount rate on future consumption of zero does the golden rule follow.     

Effectiveness of state-contingent monetary policy under a liquidity trap

Recent economic developments in Japan suggest that there is a growing interest in how monetary policy should be conducted under low inflation and nominal interest rates. In this paper, we first confirm the effectiveness of conventional wisdom against a liquidity trap, namely taking aggressive responses around the zero bound and variant of price level targeting so that it can intensify the policy duration effect, in the large scale dynamic general equilibrium model, the JEM (Japanese Economic Model). We then show that the optimal tangible policy rules around the zero bound are possibly state-contingent at the same time. J. Japanese Int. Economies 20 (3) (2006) 364–379.     

The case for price level or inflation targeting—What happened to monetary policy effectiveness during the Japanese disinflation?

This paper examines whether price level or inflation targeting would have been appropriate policy choices for Japan during its disinflation and deflation period. We employ Markov switching and structural vector autoregressions, together with structural IS equations, to investigate monetary policy effectiveness during the Japanese disinflation. We find evidence of regime switching in the mid-1990s in a model including the nominal policy interest rate. When monetary policy shocks are identified by using the McCallum rule for monetary base, a monetary expansion is found to have a statistically significant impact on prices. Moreover, a lower real ex ante interest rate can still stimulate the economy despite the zero lower bound on nominal interest rates.     

中国上市银行流动性风险综合评价研究——基于因子分析法的应用

文章从流动性储备、负债稳定性、期限结构错配程度、资本充足性、市场利率风险和盈利性六个维度选择12个流动性风险评价指标,基于因子分析法对中国上市银行2012年底的流动性风险进行综合评价。实证结论显示:同业负债成为新的银行流动性风险诱因;中长期贷款占比的下降有助于改善资产负债期限错配,降低流动性风险。现行的流动性风险监管指标难以全面反映银行流动性风险的实情,建议增加"同业负债比例"和"流动负债依存度"两个指标。     

Policy commitment and market expectations: Lessons learned from survey based evidence under Japan's quantitative easing policy

The Bank of Japan conducted its quantitative easing policy (QEP) from 2001 to 2006, with the policy commitment to maintaining its QEP until the CPI inflation rate became stably zero or higher. We evaluate its effects by using individual survey data on inflation expectations as well as interest rate expectations. Our analysis reveals a kinked relationship between interest rate expectations and inflation rate expectations at around the 0% threshold level of inflation expectations, in tune with this policy commitment. In addition, we evaluate the effects of the policy commitment on market expectations for the future path of short-term interest rates after the termination of the QEP. We find that, even when inflation expectations exceeded the threshold, interest rate expectations responded only gradually to inflation rate expectations.     

The liquidity effect in a flexible-price monetary model

This paper examines the impact of macroeconomic policy shocksin a flexible-price dynamic stochastic general equilibrium (DSGE)model with money. Rather than adopting a money supply rule,monetary policy is modelled as a central bank using a simpleinterest rate rule (Taylor rule). Without assuming price stickinessor frictions in financial markets, this model is found to accountfor liquidity effects, generate higher persistence in outputand inflation, and capture the positive unconditional cross-correlationsrelating inflation and output.     

Can exchange rate rules be better than interest rate rules?

We develop a New Keynesian small open economy model to compare the welfare performances of two classes of monetary policy rules: exchange rate rules and interest rate rules. The expected lifetime utility of the representative household is used as the welfare criterion. The model is solved using second-order approximation methods. We find that under benchmark parameterization, an exchange rate rule delivers lower standard deviations of GDP and inflation compared to an interest rate rule, when the economy has a high degree of openness. However, despite that, an exchange rate rule is welfare inferior to an interest rate rule since it delivers lower mean terms of trade, which leads to lower mean consumption and higher mean labor hours. On the other hand, when the elasticity of substitution for export is high, an exchange rate rule is welfare superior to an interest rate rule, regardless of the degree of openness, as the differences in mean terms of trade for the two classes of rules become smaller.     

中国货币政策的福利损失与政策规则选择——基于新凯恩斯DSGE模型的分析

本文在新凯恩斯主义DSGE模型框架下,运用福利损失函数和脉冲响应方法研究我国最优货币政策规则选择的问题。研究结果表明,货币供应量规则相对于利率规则,使外生冲击对产出和通货膨胀的影响更持久,造成更大的福利损失,因此中央银行的货币政策规则应该逐步从货币供应量规则转向利率规则;在一定条件下,前瞻型利率规则、后顾型利率规则和泰勒规则所造成的福利损失相差不大,从便利的角度出发,中央银行应该选择后顾型利率规则。     

The identification of liquidity effects in the EMS: Italy 1991–1992

We study the impact of liquidity shocks in Italy in the 1991–1992 period, when the lira belonged to the narrow ERM band with no exchange controls. We conduct our analysis by constructing (not simply assuming) predetermined measures of liquidity supply shocks, taking into account the institutional features of the money market and the reserve requirements' average computation system. We find that the supply of liquidity did significantly affect short-term interest rates; however, in contrast to earlier periods, most of the interest rate variations were attributable to foreign-exchange-related factors, as predicted by the asymmetric view of the ERM.     

Interest Rates, Leverage, and Money

The current mainstream approach to monetary policy is based on the New Keynesian model and is expressed in terms of a short-term nominal interest, such as the federal funds rate in the United States. It ignores the role of leverage and also downplays the role of money in basic monetary theory and monetary policy analysis. But as the federal funds rate has reached the zero lower bound and the Federal Reserve is in a liquidity trap, the issue is whether there is a useful role of leverage and monetary aggregates in monetary policy and business cycle analysis. We address these issues and argue that there is a need for financial stability policies to manage the leverage cycle and reduce the procyclicality of the financial system. We also argue that in the aftermath of the global financial crisis and Great Contraction there is a need to get away from the New Keynesian thinking and back toward a quantity theory approach to monetary policy, based on properly measured monetary aggregates, such as the new Center for Financial Stability Divisia monetary aggregates.