Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic

An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that a floor system is weakly optimal if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is strictly optimal to operate a channel system.     

Monetary–fiscal policy interactions and commitment versus discretion in a monetary union

We consider monetary–fiscal policy interactions in a monetary union. If monetary and fiscal authorities have different ideal output and inflation targets, the Nash equilibrium output or inflation or both are beyond the ideal points of all authorities. Leadership of either authority is better. Fiscal discretion entirely negates the advantage of monetary commitment: The optimal monetary rule is equivalent to discretionary leadership of monetary over fiscal policy. Agreement about ideal output and inflation creates a monetary–fiscal symbiosis, yielding the ideal point despite disagreement about the relative weights of the two objectives, for any order of moves, without fiscal co-ordination, and without monetary commitment.     

Fiscal limits and monetary policy: default vs. inflation

This paper studies the monetary policy trade-off between low inflation and low sovereign risk in the environment where fiscal authorities fail to fully ensure the sustainability of government debt. Building on the Fiscal Theory of Price Level (FTPL) and the Fiscal Theory of Sovereign Risk (FTSR), this paper differs in its baseline assumption about the monetary policy objective, which is neither to rule out defaults regardless of inflation costs (as in FTPL), nor to follow inflation targeting regardless of associated sovereign risk (as in FTSR). Instead, we study the case in which the central bank controls the risky interest rate to minimize the probability of default while ruling out large inflation hikes. We show that this policy regime can mitigate default risks only when the central bank is expected to allow sufficient increases in inflation. When agents believe that the central bank's tolerance toward inflation hikes has increased, equilibrium risk premium goes down, suggesting that information concerning changes in the central bank's preferences over inflation directly impacts default risks.     

Discretionary policy in a monetary union with sovereign debt

This paper examines the interactions between multiple national fiscal policymakers and a single monetary policy maker in response to shocks to government debt in some or all of the countries of a monetary union. We assume that national governments respond to excess debt in an optimal manner, but that they do not have access to a commitment technology. This implies that national fiscal policy gradually reduces debt: the lack of a commitment technology precludes a random walk in steady-state debt, but the need to maintain national competitiveness avoids excessively rapid debt reduction. If the central bank can commit, it adjusts its policies only slightly in response to higher debt, allowing national fiscal policy to undertake most of the adjustment. However, if it cannot commit, then optimal monetary policy involves using interest rates to rapidly reduce debt, with significant welfare costs. We show that in these circumstances the central bank would do better to ignore national fiscal policies in formulating its policy.     

INTERACTION BETWEEN MONETARY AND FISCAL AUTHORITIES UNDER INCOMPLETE INFORMATION

This paper analyzes the interaction between monetary and fiscal authorities under incomplete information. The inflation goal of the central bank is assumed to be unknown to the fiscal authority and the public. The central bank signals the goal by choosing the first‐period monetary policy before the fiscal authority joins the policy‐making game. If the central bank would like the fiscal authority and the public to believe that it is wet (dry), the central bank would distort the money supply upward (downward) in order to reveal its actual type.     

An independent central bank faced with elected governments

The literature argues that the benefits of an independent central bank accrue at no cost to the real side. In this paper, we argue that the lack of correlation between monetary autonomy and output variability is due to the proactive role of fiscal policy when faced with rigid monetary objectives. Few of the attempts to measure these correlations actually allow for a changing fiscal role. Yet, when an independent authority handles monetary policy, fiscal and wage/social protection policies remain instruments in the hands of elected governments. We find that, so long as the two authorities pursue their goals independently of each other, a conflict arises that becomes stronger as preferences diverge. We also find that the establishment of a conservative central bank encourages more divergent preferences among the public (as reflected in the government that is elected). The election of more interventionist governments then makes it harder for either authority to reach its own preferred objectives, unless cooperation is possible.     

Optimal choice of monetary policy instruments under velocity and fiscal shocks

This paper, in the spirit of Poole [Poole, William, 1970. The Optimal Choice of Monetary Policy Instruments in a Simple Macro Model. Quarterly Journal of Economics, 84, 192–216.], studies how differently monetary and fiscal shocks influence the appropriate choice of the monetary policy regime. Velocity shocks are introduced by embedding a stochastic cash-in-advance constraint within the New Keynesian framework. In addition to optimal policy under discretion, three classic rules, interest rate targeting, monetary targeting, and the Taylor rule are ranked under both fiscal and velocity shocks. The non-stationarity of prices under the Taylor rule makes it inferior to the other rules under which prices are stationary. Monetary targeting, by stabilizing aggregate demand under fiscal shocks, outperforms interest rate targeting, while the latter provides a better insulation against velocity shocks. Monetary targeting (under fiscal shocks) and interest rate targeting (under velocity shocks) even outperform the optimal policy under discretion for sufficiently high intertemporal elasticities of consumption substitution.     

Monetary and fiscal policy interactions in a post Keynesian open-economy model

Using a post Keynesian model, this study aims to analyze the stabilizing role of fiscal and monetary policies in an open economy with a managed exchange rate regime. The real exchange rate is modeled as an endogenous variable and inflation explained using the conflicting claims approach. The dynamic properties of macroeconomic equilibrium are evaluated in different regimes of fiscal and monetary policies. The main result of this study suggests that the preferred policy regime is the one in which economic authorities are complementary and fiscal policy plays an explicitly active role. In this regime, the fiscal policy must commit to the target for the rate of capacity utilization and the monetary authority must commit to the inflation target.     

Financial frictions and optimal stabilization policy in a monetary union

Financial frictions differ across countries and thus cause international differences in the transmission of shocks. This paper shows how the optimal mix of monetary and fiscal policy depends on these country-specific financial frictions. To this end, we build a two-country DSGE-model of a monetary union. Financial frictions are captured by the cost channel approach. We show that the traditional solution to the assignment problem – the common central bank stabilizes the inflation rate at the union level and the national fiscal authorities stabilize the national economies – does not hold in a world with financial frictions. The cost channel decreases the efficiency of monetary policy and increases the need for fiscal stabilization even at the union level. Moreover, the more heterogeneous the union, the more important is fiscal policy in stabilizing shocks. Finally, we evaluate the scenarios in terms of welfare of the representative household.     

The effects of fiscal spending shocks on the performance of simple monetary policy rules

We examine the effects of fiscal shocks on the performance of alternative monetary policy rules in a small dynamic general equilibrium framework. We explicitly consider the interaction between fiscal and monetary policy rules which may be present in the real world. We use a simple specification for the fiscal policy rule and various specifications for the (simple) monetary policy rule. Our analysis suggests that some form of flexible inflation targeting regime would perform well in response to fiscal shocks compared to other forms of policy regimes.     

Optimal information acquisition and monetary policy

I study optimal monetary policy with an expectational AS curve and private agents who optimally choose their amount of information pertinent to predicting policy. Shocks with time-varying variance (ARCH) induce interesting information acquisition (IA) dynamics; optimal IA affects optimal policy and vice versa. Under discretion, IA dynamics cause time-varying effectiveness of policy because of the expectational AS curve; policy may be rendered completely ineffective. In policy game equilibrium, a fall in the shock’s variance typically induces less IA and raises welfare. In one exceptional case the opposite occurs, a result which does not require implausible unstable equilibria. An agent becoming informed increases the endogenous component of economic volatility; IA therefore has a negative externality. Under commitment policy’s effectiveness is again time-varying, but policy is never completely ineffective: commitment enables the central bank to credibly limit policy’s volatility; this limits private agents’ incentive to become informed, so limits expectation-induced policy neutrality.     

MONETARY–FISCAL INTERACTIONS WITH A CONSERVATIVE CENTRAL BANK

We study macroeconomic stabilization when monetary and fiscal policies interact via their effects on output and inflation and the monetary authority is more conservative than the fiscal. We find that monetary–fiscal interactions result in poor macroeconomic stabilization. With both policies discretionary, the Nash equilibrium is suboptimal with higher output and lower inflation than optimal; the Nash equilibrium may be extreme with output higher and inflation lower than either authority want. Leadership equilibria are not second best. Monetary commitment is completely negated by fiscal discretion and yields the same outcome as discretionary monetary leadership for all realizations of shocks. But fiscal commitment is not similarly negated by monetary discretion. Optimal macroeconomic stabilization requires either commitment of both monetary and fiscal policies, or identical targets for both authorities – output socially optimal and inflation appropriately conservative – or complete separation of tasks.     

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.     

Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries

We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary–fiscal narrative for Germany, the U.S., and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of non-responsible fiscal policy and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary–fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.     

Optimal simple rules for the conduct of monetary and fiscal policy

Stabilization policy involves joint monetary and fiscal rules. We develop a model enabling us to characterize systematic simple monetary and fiscal policy over the business cycle. We principally focus on the following question. What are the key properties of the joint simple rule governing the conduct of systematic stabilization policy? We find that conducting stabilization policy incorporates not only a set of monetary policy choices governed by the so-called ‘Taylor principle’ but also fiscal policy that gives considerable force to automatic stabilizers. Recent US and UK monetary and fiscal choices seem broadly consistent with this model. This result is found to be robust to a number of alternate modeling strategies.     

CENTRAL BANK INDEPENDENCE AND THE MONETARY INSTRUMENT PROBLEM

We study the monetary instrument problem in a dynamic noncooperative game between separate, discretionary, fiscal and monetary policy makers. We show that monetary instruments are equivalent only if the policy makers' objectives are perfectly aligned; otherwise an instrument problem exists. When the central bank is benevolent while the fiscal authority is short‐sighted relative to the private sector, excessive public spending and debt emerge under a money growth policy but not under an interest rate policy. Despite this property, the interest rate is not necessarily the optimal instrument.     

Nonlinear monetary policy reaction functions in large emerging economies: the case of Brazil and China

This article estimates monetary policy rules for two key emerging market economies: Brazil and China. It analyses whether the monetary authority reacts to changes in economic activity, financial markets, monetary conditions, the foreign exchange market and the commodity price. We assess the importance of nonlinearity using a smooth transition regression (STR) model. Using quarterly data over the time period 1990:1 to 2008:4, we find that considerations about the output gap and the real effective exchange rate (in the case of Brazil), and the inflation rate (for China) explain the nonlinear adjustment of the central bank rate. Moreover, the results suggest that central banks pursue a target range for the threshold variable rather than a specific point target. In the case of China, the McCallum rule shows that the GDP growth, the interest rate and the commodity price drive the response of the growth rate of the relevant monetary aggregate.     

Unconventional monetary policy announcements and information shocks in the U.S.

We study unconventional policy shocks and information shocks associated with central bank announcements in the U.S. While unconventional policy shocks capture the direct influence of announced monetary policy actions, information shocks are associated with central bank information conveyed with the announcement. To disentangle these two types of shocks, we impose sign restrictions on high frequency changes in interest rates and stock prices around announcements. We find that information shocks lead to persistent declines in the 10-year government bond yield, whereas the actual unconventional policy shock induces only small interest rate responses. We also find that expansionary output effects of unconventional monetary policy are to some extent counteracted by the information shock.     

我国财政政策作用机制与经济周期波动的相关性研究

我国积极财政政策在总需求管理过程中起到了重要作用.通过判断我国财政政策工具和财政政策规模与经济周期波动之间的关联,描述结构VAR模型中财政政策的作用和反馈过程,我们发现我国积极财政政策操作过程中体现出了一定程度的相机选择性和对经济周期阶段的依赖性,这意味着在我国经济增长已经出现"软扩张"的经济周期态势下,应当适当调整财政政策的期限结构和政策工具,加强货币政策的组合作用,继续保持积极财政政策对国内产出的作用方向.     

货币政策与财政政策的区域产业结构调整效应比较

本文运用1978—2007年东、中、西部的面板数据分析。货币政策和财政政策是否具有区域产业结构调整效应结果显示:第一,财政政策具有产业结构调整效应,而货币政策的产业结构调整效应并不明显。第二,货币政策在对第一和第三产业的效应方面强于财政政策,而财政政策则在对第二产业的效应方面具有优势。第三,货币政策和财政政策对三次产业的效应都存在比较明显的区域效应。第四,在东部地区货币政策和财政政策对第一产业和第二产业的效应相差非常悬殊,而对第三产业的效应则集中在高位;在中部地区货币政策和财政政策对第二产业的效应集中在高位;在西部地区货币政策对第一产业的效应集中在高位,而财政政策对第一产业的效应则集中在低位。