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Opposite to mainstream economics, (post-) Keynesian economics has defended the need of a discretionary fiscal policy that helps to maintain economic activity at a full employment level, offsetting the cyclical deviations from that...
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Opposite to mainstream economics, (post-) Keynesian economics has defended the need of a discretionary fiscal policy that helps to maintain economic activity at a full employment level, offsetting the cyclical deviations from that level of output. In this sense, it is implicitly assumed that any discretionary management of public finance is, by definition, efficient. The Spanish case shows that public authorities can make an inefficient use of the discretionary room of fiscal policy, thus exacerbating the existing macroeconomic and fiscal imbalances. Consequently, there is a need for rules that constrain the discretionary management of public finance.
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This paper illustrates that the presence of a money demand distortion in an otherwise standard new Keynesian open economy model results in multiple discretionary equilibria that arise in the form of expectations traps. If private ...
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This paper illustrates that the presence of a money demand distortion in an otherwise standard new Keynesian open economy model results in multiple discretionary equilibria that arise in the form of expectations traps. If private sector inflation expectations become sufficiently unanchored, the model predicts that a monetary authority can easily be trapped into validating these expectations, thereby pushing the economy to a lower welfare equilibrium. Given the ease with which expectation traps arise in the presence of international linkages, the main result presented here suggests that maintaining well-anchored inflation expectations is a critically important policy goal for central banks in open economies.
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This paper studies how model uncertainty influences economic fluctuation when trend inflation is high. We introduce Hansen and Sargent’s [(2008) Robustness, Princeton University Press] robust control techniques into a New Keynesi...
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This paper studies how model uncertainty influences economic fluctuation when trend inflation is high. We introduce Hansen and Sargent’s [(2008) Robustness, Princeton University Press] robust control techniques into a New Keynesian model with non-zero trend inflation. We reveal the following three points. First, we find that robust monetary policy responds more aggressively. This aggressiveness increases with trend inflation. Second, as the trend inflation rises, the response of macroeconomic variables is larger under robust policy. Third, stronger robustness tends to lead to indeterminate equilibrium as trend inflation increases. Consequently, the economy might be volatile when trend inflation is high due to robustness from the view of both variance and determinacy. We interpret the results as indicating that the model uncertainty might be the one of the factors causing large macroeconomic fluctuations when trend inflation is high.
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We examine how economic policy-induced uncertainty influences managers' discretionary accounting choices to achieve a smoother earnings stream. We find that managers offset the partial risk of policy uncertainty on reported earnin...
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We examine how economic policy-induced uncertainty influences managers' discretionary accounting choices to achieve a smoother earnings stream. We find that managers offset the partial risk of policy uncertainty on reported earnings by using discretionary accruals. We mainly observe that firms report more negative discretionary accruals when managers are less certain about their prospects. We further show that managers' engagement in income-decreasing earnings management is more significant when firms' current period pre-managed earnings are higher. To complete the story, we also find that the propensity of reversal of discretionary accruals is positively associated with levels of policy uncertainty. Our results imply that managers opportunistically use discretionary accruals around an uncertain exogenous environment to smooth earnings.
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Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional...
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Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach in favor of a projection method approach. We investigate the size of the inflation bias that arises in a microfounded nonlinear environment with Calvo price setting. The inflation bias is found to lie between 1% and 6% for a reasonable range of parameter values, when the bias is defined as the steady-state deviation of the discretionary inflation rate from the optimal inflation rate under commitment.
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Inventory models customarily assume that demand is fully satisfied if sufficient stock is available. We analyze the form of the optimal inventory policy if the inventory manager can choose to meet a fraction of the demand. Under c...
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Inventory models customarily assume that demand is fully satisfied if sufficient stock is available. We analyze the form of the optimal inventory policy if the inventory manager can choose to meet a fraction of the demand. Under classical conditions we show that the optimal policy is again of the (S, s) form. The analysis makes use of a novel property of K-concave functions.
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Does an inflation conservative central bank a la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic, stochastic...
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Does an inflation conservative central bank a la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic, stochastic sticky-price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment generates too much inflation. A conservative monetary authority thus remains desirable. When fiscal policy is determined before monetary policy each period, the monetary authority should focus exclusively on stabilizing inflation. Monetary conservatism then eliminates the steady state biases associated with lack of monetary and fiscal commitment and leads to stabilization policy that is close to optimal.
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This paper examines the linkages between monetary policy equilibria and asymmetric preferences. Much has been written on the relationship between discretionary monetary policy and policy under commitment from a timeless perspectiv...
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This paper examines the linkages between monetary policy equilibria and asymmetric preferences. Much has been written on the relationship between discretionary monetary policy and policy under commitment from a timeless perspective. Additionally, there is a relatively robust literature that suggests monetary policy in the U.S. responds asymmetrically to fluctuations in the output gap. Here, asymmetric optimal policy is analyzed under both commitment and discretion in a simple dynamic New-Keynesian model. The timeless perspective equilibrium leads to a policy rule with inertia (consistent with the literature), but in this case implies asymmetry over time. This result is not found under discretion. Both model variants and those imposing linearity are estimated for five developed economies. Policy deviations are simulated for the linear and nonlinear rules. Results imply that the asymmetric commitment policy produces the lowest average deviations from observed policy, and also the policy deviations with the smallest variance, for all five countries. A linear Taylor rule produces statistically larger average deviations than both asymmetric commitment and asymmetric discretionary policy. (C) 2016 Elsevier Inc. All rights reserved.
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Modern Money Theory (MMT) has risen to prominence in popular policy debates within macroeconomics. MMT economists argue for creating a job guarantee program, which they argue would generate price stability. Using a benchmark model...
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Modern Money Theory (MMT) has risen to prominence in popular policy debates within macroeconomics. MMT economists argue for creating a job guarantee program, which they argue would generate price stability. Using a benchmark model of time consistency supplemented with a job guarantee, we conclude that once policymakers' incentives are considered, the job guarantee does nothing to help stabilize prices. We compare this program to a competing proposal to maintain price stability and full employment, NGDP targeting.
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The payment of interest on reserves has been a common practice in inflationary economies. This policy may seem paradoxical since it involves returning part of the seigniorage, generated by the inflation process, with the intention...
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The payment of interest on reserves has been a common practice in inflationary economies. This policy may seem paradoxical since it involves returning part of the seigniorage, generated by the inflation process, with the intention to finance the fiscal deficit. This paper argues that the motivation for this policy can be captured by the discretionary regime, where the policymaker pays interest on reserves because he is concerned with the erosion of real liquidity by inflation, which is in part beyondhis control. However, this policy is an unlikely outcome in the commitment regime, where the policymaker is in full control of inflation.
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