PRICE DISPERSION,INFLATION, AND WELFARE*

We examine the implications of inflation for both price dispersion and welfare in a monetary search economy. In our economy, if the degree of buyers' incomplete information about prices is fixed, both price dispersion and real prices are increasing in inflation. As the inflation rate approaches the Friedman rule, both price dispersion and welfare losses vanish. If households choose the number of prices to observe, then the optimal inflation rate may exceed the Friedman rule as inflation induces search and, up to a point, raises welfare by eroding market power.     

Inflation, Price Level and Hybrid Rules under Inflation Uncertainty

The performance and robustness of optimised interest rate rules are analysed in a New Keynesian model estimated for the euro area economy. In particular, we examine the properties of rules responding to inflation, the price level, or a combination of the two (a hybrid rule). All the rules also respond to the output gap. The optimal hybrid rule is only marginally superior when there is no model uncertainty. When there is uncertainty about the degree of inflation persistence, the inflation rule is the most robust rule and the performance of the other two rules deteriorates. However, all the rules perform well if the true degree of inflation persistence turns out to be less than policymakers’ estimate.     

State-dependent pricing, inflation, and welfare in search economies

We investigate the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which strictly positive inflation is desirable. We relate this condition to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for our numerical examples provided menu costs are small. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.     

Optimal monetary rules: the case of Brazil

Within a dynamic programming approach, an optimal rule for the central bank to attain its inflation targeting goals is derived. The short-run nominal interest rate is used as an instrument to achieve monetary objectives. The model is tested for the Brazilian economy and compared with results found for other countries. Evidence for the estimated feedback interest rule for the Central Bank suggests that the cost of reducing inflation in an open economy is lower than that of a closed economy.     

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.     

Optimal monetary policy for a small open economy

This paper focuses on the design of monetary policy rules for a small open economy. The model features optimizing behavior, general equilibrium and price stickiness. The real exchange rate is shown to affect the firm's real marginal cost, aggregate supply and aggregate demand. The welfare objective depends on the openness of the economy, and the optimal policy rule differs from that which obtains in a closed economy. The inflation versus output gap stabilization trade-off is caused by the real exchange rate. The implied optimal monetary policy regime is domestic inflation target coupled with controlled floating of the real exchange rate.     

Optimal interest rate rule in a DSGE model with housing market spillovers

This paper studies the optimal interest rate rule in a DSGE model with housing market spillovers (Iacoviello and Neri, 2010). We find that the optimal rule responds to house price inflation even when the stabilization of house price is not among the objectives of the policymaker, and that the strength of the response depends crucially on a few structural parameters.     

Endogenous Time Preference, Inflation, and Capital Accumulation

In an infinitely lived, representative agent model with the Becker-Mulligan (1997) endogenous time preference, this paper reexamines the effects of monetary growth. An increase in the inflation rate reduces the resources spent on imagining the future, which increases the rate of time preference and decreases the steady-state value of capital stock. This model relates inflation and consumer patience, and shows that inflation will make people less patient. Finally, Friedman's optimal monetary growth rule is also investigated and found not to hold.     

The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics

Using a simple, tractable model, this paper revisits and expands upon issues relating to optimal monetary policy rules (MPRs) in open economies. The optimality of the rule is explored through various specifications of a central bank loss function as it is the loss function that offers insight into central bank preferences. Many of the issues on this topic have centred on the role of the exchange rate: Is it optimal for the policy instrument to react to the exchange rate? What is the role of the exchange rate in a domestic inflation targeting vs CPI inflation targeting? Does a fear of floating have any bearing on the way optimal MPRs are constructed? While this paper is not empirical, the analysis is relevant for central banks in open and developing economies that face a choice between allowing exchange rates to float (and adopting an inflation targeting regime) and engaging in some degree of exchange rate fixity.     

The Optimal Inflation Tax

We determine the second best rule for the inflation tax in monetary general equilibrium models where money is dominated in rate of return. The results in the literature are ambiguous and inconsistent across different monetary environments. We derive and compare the optimal inflation tax solutions across the different environments and find that Friedman's policy recommendation of a zero nominal interest rate is the right one.Journal of Economic LiteratureClassification Numbers: E31, E41, E58, E62.     

A Macroeconomic Perspective on Reserve Accumulation

This paper nests the buffer stock model within a standard open-economy model to capture two motives for international reserves accumulation—the insurance motive and the export-led growth motive. The model is solved for two exchange-rate policies, discretion and a rule with escape clause. It illustrates the behavior of international reserves and other macroeconomic variables when the policymaker pursues output and inflation stabilization and recognizes the supply of reserves can constrain the choice of exchange rate and the choice of exchange rate affects the supply of reserves. When output is below potential, it is optimal under both discretion and the rule to adopt a weak currency and promote export-led growth to achieve output and inflation stabilization. This policy leads to reserve accumulation and is consistent with the behavior of China. When reserves are low initially, welfare is higher when the policymaker follows a rule.     

A comparison of optimal policy rules prior to and during inflation targeting: empirical evidence from Bank of Canada

We examine policy rules that are consistent with inflation targeting (IT) framework in a small macroeconomic model of the Canadian economy. We set up an optimal linear regulator problem and derive policy rules to compare the dynamics of pre-IT and IT eras. We find that while the optimal monetary policy rule in the pre-IT period is best described with a loss function that attaches equal weight to price stability, financial stability and output stability; the IT era is dominated by the price stability objective followed by the financial stability and output stability, consecutively. Moreover, we do not find an explicit role for exchange rate stability in the objective function of the Bank of Canada for both monetary policy eras. We, then, compare the properties of the derived optimal rules with those of an ad hoc Taylor rule for the IT period. In response to inflationary shocks, Taylor rule brings down inflation rates more quickly compared to the derived policy rules, but at the cost of a higher sacrifice ratio and more volatile interest rates.     

OPTIMAL CONTRACTS FOR CENTRAL BANKERS AND PUBLIC DEBT POLICY*

We consider how the second‐best allocation corresponding to an optimal rule under the policy commitment of a central bank and a fiscal authority with a consolidated government budget constraint can be achieved, even though these authorities are unable to commit themselves to their optimal policies and ignore the strategic interaction between their policies. Our results show that the best practical institutional arrangement is to have an instrument‐independent central bank that controls the money supply to determine the rate of inflation and commits itself to an inflation target that depends on fiscal variables.     

Interest rate rules, inflation and the Taylor principle: an analytical exploration

Summary. The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the “Taylor principle”, according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.Received: 6 November 2003, Revised: 17 August 2004 JEL Classification Numbers: E5, E52, E58.J.-P. Bénassy: I wish to thank Daniel Laskar and an anonymous referee for their perceptive comments on earlier drafts of this paper. Of course all remaining deficiencies are mine.     

The performance and robustness of simple monetary policy rules in models of the Canadian economy

Abstract.  In this paper, we evaluate seven simple monetary policy rules in a wide range of models of the Canadian economy. Our results indicate that none of the seven simple policy rules we examined is robust to model uncertainty, in that no single rule performs well in all models. In fact, our results show that the performance of some of the simple rules, particularly rules with interest rate smoothing and rules with a high coefficient on the inflation gap, can substantially deviate from that of the optimal rule and can even be unstable in some models. Furthermore, we find that "open‐economy" rules do not perform well in many models. We find that adding an exchange rate term to a simple policy rule often increases the value of the policy‐maker's loss function. Although it is not robust, we find that a simple nominal Taylor‐type rule that has a coefficient of 2 on the inflation gap and 0.5 on the output gap outperforms the other simple rules in a certain class of models. However, even in those models, the loss‐function value of this simple rule can be substantially higher than that of the optimal or base‐case rule. JEL classification: E52, E58     

通货膨胀、政府收益与社会福利损失

传统"Cagan规则"认为,政府通货膨胀税收益最大化的条件是,通货膨胀率应该为(货币需求关于)利率半弹性的倒数。这一规则是局部均衡条件下的结果,并未考虑通胀的实际经济效应。本文基于交易成本方法在一般均衡框架内讨论收益最大化时通货膨胀率的决定问题。该框架中收益最大化的通货膨胀率小于Ca-gan规则值,这一结论得到了中国1945—1949年恶性通胀时期经验数据的支持。经验结果还表明,相对于Cagan规则,根据交易成本方法设定的通货膨胀率尽管并没有明显提高政府的通货膨胀税收益,却大幅降低了社会福利损失。     

最优货币政策规则的选择及在我国的应用

本文首先根据我国的实际数据 ,建立和估计混合型模型 ,并以此作为研究货币政策规则的基本框架。然后在随机模拟的基础上 ,以社会福利为基准 ,计算和比较三种货币政策决策方式对社会福利的影响 ,这三种决策方式是完全承诺的最优货币政策规则、最优的Taylor规则及相机抉择。同时计算与福利损失等价的通胀率变化 ,结果表明 ,最优的Taylor规则能够很好地近似完全承诺的最优货币政策规则 ,这为进一步改进我国货币政策的决策和操作提供了一个指导方向。其次 ,对我国目前的货币政策决策和操作存在的问题进行分析 ,特别是对目前我国盯住货币供应量的体制所存在的问题进行分析 ,并提出改进的方案     

Real wage rigidities and optimal monetary policy in a small open economy

The main objective of the study is to provide a theoretical analysis of optimal monetary policy in a small open economy where households set real wage in a staggered fashion. The introduction of real wage rigidities plays a important role to resolve main shortcomings of the standard new Keynesian small open economy model. The main findings regarding the issue of monetary policy design can be summarized as three fold. First, the optimal policy is to seek to minimize variance of domestic price inflation, real wage inflation, and the output gap if both domestic price and real wage are sticky. Second, controlling CPI inflation directly or indirectly induces relatively large volatility in output gap and other inflations. Therefore, both CPI inflation-based Taylor rule and nominal wage-inflation based Taylor rule are suboptimal. Last, a policy that responds to a real wage inflation is most desirable.     

通胀目标制与汇率目标制不能共存吗

基于汇率传递的风险溢价渠道，本文将我国利率调控通胀、外汇储备对冲干预汇率纳入新凯恩斯政策模型，构建双目标双工具政策分析框架，比较泰勒规则与双目标双工具规则下通胀目标与汇率目标共存的经济机制与效应。本文模拟显示：（1）双目标双工具政策框架下通胀目标与汇率目标能够共存，此时通过影响汇率风险溢价来盯住汇率不影响通胀；而单工具政策下两目标无法共存，此时降低国内资产的收益率盯住汇率会刺激居民的消费行为引起通胀。（2）国际资本冲击下，双目标双工具政策在固定汇率的同时能保证经济稳定；而当贸易条件恶化时，选择完全浮动汇率制度最优。央行政策损失分析进一步验证了以上结论。（3）随着金融市场化改革深入，外汇储备稳定汇率的有效性将下降，冲销成本会大幅提升。资本账户开放下，双目标双工具政策仍是央行抵御外部资本冲击的首选政策；但是汇率市场化后，通胀目标制与双目标双工具政策效果基本无差异。本文结论的启示是：面对国际资本，需必要的汇率管制；但是面对贸易冲击，可适度提升汇率弹性来减少冲击对产出和通胀的影响。     

Asymmetric monetary policy rules for the euro area and the US

We analyse the implications of asymmetric monetary policy rules by estimating Markov-switching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB’s response to inflation was more forceful when inflation was above than below the central bank’s aim. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute optimal simple rules for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades.