Monetary policy rules with PID control features: evidence from the UK,USA and EU

ABSTRACT

This paper considers the extent to which the monetary policy operations of three major central banks can be regarded as an application of Proportional-Integral-Derivative (PID) control rules. The paper outlines the general PID framework and estimates a series of dynamic models to identify how interest rate policy adjustments are affected by the rate of inflation and the level of macroeconomic activity. The paper examines data for the UK, the USA and the Eurozone. The results suggest that the PID rules can provide a useful theoretical and empirical framework for estimating central bank responses to the inflation and macroeconomic activity variables by improving the explanatory power of the Taylor rule model and determining the effect of the parameters.     

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.     

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.     

China’s monetary policy: Quantity versus price rules

Two monetary policy rules, the money supply (quantity) rule and interest rate (price) rule, are explored for China in a dynamic stochastic general equilibrium model. The empirical results seem to indicate that the price rule is likely to be more effective in managing the macroeconomy than the quantity rule, favoring the government’s intention of liberalizing interest rates and making a more active use of the price instrument. Moreover, the economy would have experienced less fluctuations had interest rate responded more aggressively to inflation.     

Monetary policy rules and directions of causality: A test for the euro area

Abstract

Using a VAR model in first differences with quarterly data for the euro zone, the study aims to ascertain whether decisions on monetary policy can be interpreted in terms of a “monetary policy rule” with specific reference to the so-called nominal GDP targeting rule (Hall and Mankiw, 1994 Granger, C.W.J. “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods.” Econometrica, 1969, 37 (3), 424–438.[Crossref], [Web of Science ®] , [Google Scholar]; McCallum, 1988 McCallum, B. “Nominal GDP Targeting”, Shadow Open Market Committee, October 21, 2011. [Google Scholar]; Woodford, 2012 Taylor, J.B., Williams, J.C. “Simple and Robust Rules for Monetary Policy”, NBER Working Paper No. 15908, April, 2010. [Google Scholar]). The results obtained indicate a causal relation proceeding from deviation between the growth rates of nominal gross domestic product (GDP) and target GDP to variation in the three-month market interest rate. The same analyses do not, however, appear to confirm the existence of a significant inverse causal relation from variation in the market interest rate to deviation between the nominal and target GDP growth rates. Similar results were obtained on replacing the market interest rate with the European Central Bank refinancing interest rate. This confirmation of only one of the two directions of causality does not support an interpretation of monetary policy based on the nominal GDP targeting rule and gives rise to doubt in more general terms as to the applicability of the Taylor rule and all the conventional rules of monetary policy to the case in question. The results appear instead to be more in line with other possible approaches, such as those based on post Keynesian analyses of monetary theory and policy and more specifically the so-called solvency rule (Brancaccio and Fontana, 2013 ———. Macroeconomics, 2nd ed., Pearson Education Company, ch. 30. [Google Scholar], 2015 Brancaccio, E. The Central Banker as “Regulator” of Conflict. In G. Fontana and M. Setterfield (eds.), Macroeconomic Theory and Macroeconomic Pedagogy. Basingstoke: Palgrave Macmillan, 2009, 295–308.[Crossref] , [Google Scholar]). These lines of research challenge the simplistic argument that the scope of monetary policy consists in the stabilization of inflation, real GDP, or nominal income around a “natural equilibrium” level. Rather, they suggest that central banks actually follow a more complex purpose, which is the political regulation of the financial system with particular reference to the relations between creditors and debtors and the related solvency of economic units.     

Fuzzy Targeting Indices and Orderings

The targeting efficiency and the coverage of social programs for the poor are typically analyzed by partitioning the total population in four mutually exclusive groups: the poor who benefit from a program or policy, the poor who do not benefit, the non‐poor who benefit, and the non‐poor who do not benefit. While useful, this partition into crisp sets may not capture the difficulty of identifying the poor. This paper presents a method that consists of using a membership function to identify to what extent households can be considered as poor or non‐poor. The method builds on fuzzy sets theory whereby the definition of the boundaries of a set, say the poor or the non‐poor, is fuzzy. We characterize the properties that membership functions should have, and we test for the robustness of targeting performance comparisons to the choice of the membership function.     

国外创新政策评估与设计研究述评

创新是经济长期增长和经济快速发展的关键动力,创新政策在其中发挥了重要的作用。本文首先界定了创新政策和创新政策评估与设计的内涵,创新政策是创新系统的表现形式,创新政策评估与设计是一个系统内与创新相关的主体行为规则体系的评估及再造的理论和方法体系。其次阐述了两种不同的创新政策的的形式及理论基础,在新古典主义经济学理论中,公共政策干预的一个必要条件是市场失灵;在创、新和演化经济学理论中,创新政策制定的注意力从注重市场失灵转向解决系统失灵。在上述两种分析框架下,深入探讨和分析了创新政策实践。最后对国外创新政策评估与设计研究现状进行了概括和评价,列举了国外创新政策评估与设计研究的特征,指出了研究中的不足。     

FROM DIRECT SUPPORT OF BUSINESS SECTOR R&D/INNOVATION TO TARGETING VENTURE CAPITAL/PRIVATE EQUITY: A CATCHING-UP INNOVATION AND TECHNOLOGY POLICY LIFE CYCLE PERSPECTIVE

The paper presents a generic, three-phase innovation and technology policy (ITP) model which, in a number of contexts, could lead to the successful rise of venture capital (VC) or related equity-based support and finance systems for innovative SMEs both in high- and non-high-tech sectors. There has been increasing recognition that such systems could facilitate country attempts at latching into the ICT revolution, catching-up and deepening of R&D/Innovation; and for facilitating the transition to a knowledge/learning economy. Whereas the model is inspired by the successful Israeli experience during the 1969–2000 period, the other examples referred to in the paper suggest that it is adaptable to other contexts as well. A critical analytical point is whether, in the wake of direct government support of business sector (BS) R&D/Innovation (Phase 1), conditions will emerge for the successful emergence of VC or related industries in Phase 3 (and, whenever necessary, for the successful policy targeting of such industries). These are termed Phase 2 conditions; and the paper refers to three Phase 2 profiles: the Israeli profile; the Chilean profile; and a third ‘strategic’ profile, which seems to have been adopted by Korea. The analysis strongly suggests that a multiphase ITP model could be an important analytical tool both for policy analysis and for policy making. Over and beyond its emphasis on the dynamic links between direct Government support of BS R&D/innovation and subsequent policies directed to VC, the paper also shows that policy could be subject to increasing rather than to decreasing returns.     

The development of technology foresight: A review

The term “foresight” has long been used to describe readiness to deal with long-term issues (especially on the part of governments). This term “Technology Foresight” took off in the 1990s, as European, and then other, countries sought new policy tools to deal with problems in their science, technology and innovation systems. Large-scale exercises drew in numerous stakeholders as sources of knowledge and influence, and the prominence of these exercises led to “foresight” being used much more widely to describe futures activities of many kinds. While few new tools and techniques have been developed in these exercises, they represent an unprecedented diffusion of forecasting, planning and participatory approaches to long-term issues. Futures approaches are, in consequence, far more officially acceptable and legitimate than in the past.     

The role of the technology barometer in assessing the performance of the national innovation system

Along with increasing significance of innovation in socio-economic development grows the need to utilize future-oriented knowledge in innovation policy-making. Foresight and road-map exercises are aimed at supporting planning and priority-setting of R&D and have become indispensable elements of policy-making. Besides technological development decision-makers need all-inclusive knowledge of future developments of society, economy and impacts of science and technology. When the worldwide competition is about the attractiveness of innovation systems, such knowledge is important for comparing the innovation performance of nations to other economies. Finland is among the countries improving her position in worldwide performance comparisons since the late 1990s and reached leading nations in early 2000s. This attainment raised national interest and critical debate of the reliability of the data basis and methodologies used in comparisons. In The Finnish Association of Graduate Engineers (TEK) this discussion led to a decision to develop an own comparative exercise together with VTT. In addition to performance analysis based on ex-post indicators the barometer includes the questionnaire of the views and visions of the future development by relevant national actors. The theoretical framework of the barometer is based on the evolution of economies from industrial development phase to sustainable knowledge society. The barometer has been undertaken in 2004, 2005 and 2007, and a wide interest and emerged discussion of barometer proves that a social interest and order exists for the barometer. The article presents the background, methodology and results of technology barometer, discusses its impacts on national discussion, and gives perspectives for the future development of barometer.     

Portugal at the crossroads of change, facing the shock of the new: People, knowledge and ideas fostering the social fabric to facilitate the concentration of knowledge integrated communities

Portugal has recently achieved the average OECD level in terms of the number of researchers per thousand workforce and the need to continue fostering the advanced training of human resources and the concentration of knowledge integrated communities as drivers of larger communities of users is discussed in the context of changing and evolving patterns in Portugal. This requires an ongoing public effort, but also a better understanding of the effectiveness of the mix of public support mechanisms and private incentives for the development of knowledge networks and flows of skilled people in times of increased uncertainty.Our hypothesis gains from the experience of a unique set of international collaborations with leading institutions worldwide that has been successfully developed over the last years based on thematic R&D networks, integrating advanced training initiatives and programs of industrial affiliation. It is in this context that we frame our hypothesis and argue for the need for Portugal to continue attracting and fostering open and dynamic “creative communities”.The main policy implication of our analysis is that Portugal needs to double the number of researchers per thousand workforce in the coming years. This requires a broad social basis for science policies across a wide range of public and private sectors, as well as that innovation is considered together with competence building and the need to foster individual skills through the complex interaction between formal and informal qualifications. Emerging user-centered innovation requires users able to access new knowledge. This implies a broad societal engagement in knowledge activities, including higher education enrolment, and we need to strengthen the top of the research system in order to create a locus of knowledge production at the highest level. But it also implies consideration of the social shaping of technology, because incentives and infrastructures do not operate in a vacuum, but shape and are shaped by the particular context in which they operate. Strengthening external societal links and “system linkages” is critical in making the institutional changes required to meet the needs of global competition and the knowledge economy.     

The effects of welfare vehicle asset rules on vehicle assets

Before 1996, households were typically ineligible for welfare if they had assets worth more than $1000, where $1500 from each vehicle's value was excluded from this determination. However, the 1996 welfare reform act began allowing states to increase their asset limits and vehicle exclusions. This may prompt low-income households to reallocate resources to or from vehicles. We examine the effects of state vehicle asset rules on vehicle assets. Results show that liberalizing asset rules increases vehicle assets and that this increase is driven largely by eligible individuals increasing vehicle assets, with no evidence indicating that ineligible individuals reduce vehicle assets to become eligible.     

Emergent foresight processes: industrial activities in wireless communications

Technology foresight has received growing attention among those involved in the shaping and implementation of science and technology (S&T) policies. However, although evaluative analyses of foresight exercises have supplied evidence on acclaimed benefits—such as the generation of future-oriented knowledge and strengthening of collaborative networks—they also point to challenges in translating foresight results into actions within research and technology development (RTD) organizations. In this article, we address these challenges by considering the work of the Wireless World Research Forum (WWRF), which has sought to promote the conception, development, and diffusion of wireless communication technologies. Specifically, by contrasting this work with well-known government-initiated foresight exercises, we typify so-called explicit, emergent, and embedded foresight activities and explore their interrelationships. Our comparative analysis points to conditions under which policy interventions may not be needed for the emergence of foresight activities that exert a major influence on RTD agendas. It also suggests several context-dependent roles for public policy, among which government-driven foresight exercises and the catalysis of more narrowly focused activities are but two examples.     

Profiling the Fuzzy Latent Structure of Multidimensional Poverty: Toward Valuable Insights for Poverty Policymakers

Abstract

Several multidimensional poverty indices have been proposed, and have been extensively studied in the literature. On the other hand, the need for aggregation of poverty indicators into one multidimensional index has been questioned. It has been argued even so that this aggregation can be misleading for political targeting strategies. Subsequently, some researchers have advocated that the use of the latent class analysis would address these issues. However, this setting does not allow to take into account the fuzzy nature of the latent poverty concept. The contribution here is to use the Grade-of-Membership (GoM) model to profile the fuzzy latent structure of multidimensional poverty, for a more realistic handling of this phenomenon. The application of the GoM methodology to multivariate poverty data for the Tunisian case reveals four most prevalent multidimensional poverty profiles. The results emphasize the role played by contextual effects. Indeed, the rural cluster is suffering more intense deprivation and groups in the central and coastal regions have a more comfortable status in comparison with the group of households residing in inland regions. A thorough analysis of these patterns is put forward in this research, giving valuable insights to policy makers.     

Government policy in the formal and informal sectors

The paper quantitatively investigates, in general equilibrium, the interaction between the firms' choice to operate in the formal or the informal sector and government policy on taxation and enforcement, given a level of regulation. A static version of Ghironi and Melitz's (2005) industry model is used to show that firms with lower productivity endogenously choose to operate in the informal sector. I use cross-country data on taxes, measures of informality, and measures of regulation (entry and compliance costs, red tape, etc.) to back out how high the enforcement levels must be country by country to make the theory match the data. The welfare gains from policy reforms are on average 1.2% (measured in terms of consumption) for OECD countries. I also find that the welfare gains from reducing regulation are on average 2.1%. Finally, performing a similar decomposition to that of Hall and Jones (1999), I find that distortions associated with informality account for a factor of 1.5 of the output per capita difference between the richest and the poorest countries.     

Evolutionary targeting

Evolutionary Targeting is a dynamic, systems-evolutionary policy perspective which focuses on triggering, re-enforcing and sustaining market-led evolutionary processes of emergence of Multiagent Structures (industries, clusters, markets, etc). A major aspect is leveraging existing successes in firms to promote emergence of such structures. This requires discrete policy interventions directed at varying areas of system/market failure, which make their appearance at difference phases of the overall process. The paper briefly illustrates the approach through an analysis of VC policies in Israel and selected European countries, and by referring to the traditional view of Infant Industry development and existing views on high tech cluster development. The resulting framework of analysis, which differs radically from the ‘Picking Winners’ policies of the past and from the successful targeting of infant industries in Korea and post war Japan, seems to fit the increasingly turbulent and high return/high risk global environment prevailing today.

文化产业园区创新要素、创新环境与创新绩效：一个有调节的中介作用模型

文章基于产业集聚的观点,以创意人才为研究对象,探讨文化园区创新要素对创新绩效的影响机制,并探究创新环境的中介作用,检验政策配置的调节作用。建立基于文化产业园区创新要素与创新绩效的调节中介作用模型,运用问卷调查进行实证分析。结果表明：(1)创新要素对创新环境具有显著正向影响,但创新要素的三个维度中,社会网络、个人成长对创新绩效影响不显著;(2)创新要素中的信息共享与知识溢出维度和创新绩效直接显著,而个人能力通过创新环境中介作用影响创新产出;(3)政策配置在创新环境和创新绩效的中介效应中起到正向调节作用,政策支持力度越高对创新产出的影响越大。因此,政府应该引导建立以创新为导向的要素集聚,通过营造良好的创新氛围,完善社会网络结构,降低区域的创新阻力,进而提升文化创造力的集聚与外溢能力。     

The evolution of portfolio rules and the capital asset pricing model

The aim of this paper is to test the performance of capital asset pricing model (CAPM) in an evolutionary framework. We model an economy where a heterogeneous population of long-lived agents invest their wealth according to different portfolio rules, and prove that traders who either “believe” in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run.We show that a sufficient condition to drive CAPM or mean-variance traders’ wealth shares to zero is that an investor endowed with a logarithmic utility function enters the market.     

Counting combinatorial choice rules

I count the number of combinatorial choice rules that satisfy certain properties: Kelso–Crawford substitutability, and independence of irrelevant alternatives. The results are important for two-sided matching theory, where agents are modeled by combinatorial choice rules with these properties. The rules are a small, and asymptotically vanishing, fraction of all choice rules. But they are still exponentially more than the preference relations over individual agents—which has positive implications for the Gale–Shapley algorithm of matching theory.