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This paper explores how sensitive is monetary policy to the precise preferences of the central bank over inflation and economic activity. It does so in order to address a puzzle-which is that the U.S. Fed and the Bank of England a...
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This paper explores how sensitive is monetary policy to the precise preferences of the central bank over inflation and economic activity. It does so in order to address a puzzle-which is that the U.S. Fed and the Bank of England appear to have quite different objectives and yet have adopted strikingly similar policies in recent years. I use a calibrated model to assess how policy might be sensitive to attaching different weights to inflation, output, and the output gap in central bank objectives. I find that a wide range of weights can give rise to rather similar monetary policies.
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This paper quantifies the effects on welfare of misspecified monetary policy objectives in a stylized DSGE model. We show that using inappropriate objectives generates relatively large welfare costs. When expressed in terms of'con...
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This paper quantifies the effects on welfare of misspecified monetary policy objectives in a stylized DSGE model. We show that using inappropriate objectives generates relatively large welfare costs. When expressed in terms of'consumption equivalent'units, these costs correspond to permanent decreases in steady-state consumption of up to two percent. The latter are generated by both the inappropriate choice of weights and the omission of variables. In particular, it is costly to assume an interest-rate smoothing incentive for central bankers when it is not socially optimal to do so. Finally, a parameter uncertainty decomposition indicates that uncertainty about the properties of markup shocks gives rise to the largest welfare costs.
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This paper identifies leadership regimes in monetary-fiscal policy interactions in three countries, the uk, the US and Sweden. We specify a small-scale, structural general equilibrium model of an open economy and estimate it using...
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This paper identifies leadership regimes in monetary-fiscal policy interactions in three countries, the uk, the US and Sweden. We specify a small-scale, structural general equilibrium model of an open economy and estimate it using Bayesian methods. Weassume that the authorities can act strategically in a non-cooperative policy game, and compare different leadership regimes. We find that the model of fiscal leadership gives the best fit for the UK and Sweden, while in the US the Nash or non-strategicregime dominates. We assess the extent to which policy maker preferences reflect micro-founded social preferences.
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摘要 :
This paper identifies leadership regimes in monetary-fiscal policy interactions in three countries, the uk, the US and Sweden. We specify a small-scale, structural general equilibrium model of an open economy and estimate it using...
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This paper identifies leadership regimes in monetary-fiscal policy interactions in three countries, the uk, the US and Sweden. We specify a small-scale, structural general equilibrium model of an open economy and estimate it using Bayesian methods. Weassume that the authorities can act strategically in a non-cooperative policy game, and compare different leadership regimes. We find that the model of fiscal leadership gives the best fit for the UK and Sweden, while in the US the Nash or non-strategicregime dominates. We assess the extent to which policy maker preferences reflect micro-founded social preferences.
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Ten years after the 2008-09 global financial crisis, most advanced economies have recovered and global economic growth has taken hold. However, partly due to accommodative financial conditions, financial risks are on the rise whil...
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Ten years after the 2008-09 global financial crisis, most advanced economies have recovered and global economic growth has taken hold. However, partly due to accommodative financial conditions, financial risks are on the rise while inflation remains subdued. This revives the debate on the role of monetary policy in containing financial risks. This paper provides a framework to investigate trade-offs between macroeconomic and financial stability when the central bank has a financial stability objective. Relying on a New Keynesian model with an endogenous financial bubble, our simulations suggest that a central bank attempting to "lean against the wind" may face trade-offs between inflation/output stability and financial stability. We therefore argue that the interest rate should be used for achieving traditional macroeconomic goals, and a second, macroprudential instrument should complement the policy rate to tackle financial risk accumulation.
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In response to the ongoing discussion in the literature of the appropriate framework for monetary policy, we compare two of the most frequently discussed alternatives to inflation targeting-targeting either the level of nominal GD...
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In response to the ongoing discussion in the literature of the appropriate framework for monetary policy, we compare two of the most frequently discussed alternatives to inflation targeting-targeting either the level of nominal GDP or the price level-within the context of a simple vector autoregressive (VAR) model. Our approach can be considered a constrained-discretion approach. The model is estimated using quarterly data over the period 1979:4-2003:4, a period in which the economy was buffeted by substantial supply and demand shocks. The paths of the federal funds rate, nominal GDP, real GDP, and the price level under nominal GDP and price level targeting are simulated over the 2004:1-2006:4 period. We evaluate nominal GDP and price level targeting by computing the values of simple loss functions. The loss function values indicate that closely targeting the path of nominal GDP based on 4.5% desired growth in nominal GDP produces noticeably lower losses in the simulation period than either price level targeting or a continuation of the implicit flexible inflation targeting monetary policy that characterized the estimation period.
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Modern theories of government finance stress the importance of an economy's fiscal deficits in determining the course of monetary policy. Modern growth theory stresses the role of monetary factors in economic growth. This paper ex...
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Modern theories of government finance stress the importance of an economy's fiscal deficits in determining the course of monetary policy. Modern growth theory stresses the role of monetary factors in economic growth. This paper explores how these two are interrelated, using a simple AK growth model, one with money, reserve requirements, and government debt. We provide a comprehensive look at the coordination of macroeconomic policy and its effects on long-run growth under three alternative coordinating arrangements. We uncover some unconventional results regarding the relationship between growth and a number of policy variables; these rest squarely on the constraint of the coordination process.
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Abstract We study rules based on instruments versus targets. Our application is a New Keynesian economy where the central bank has non-contractible information about aggregate demand shocks and cannot commit to policy. Incentives ...
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Abstract We study rules based on instruments versus targets. Our application is a New Keynesian economy where the central bank has non-contractible information about aggregate demand shocks and cannot commit to policy. Incentives are provided to the central bank via punishment which is socially costly. Instrument-based rules condition incentives on the central bank’s observable choice of policy, whereas target-based rules condition incentives on the outcomes of policy, such as inflation, which depend on both the policy choice and realized shocks. We show that the optimal rule within each class takes a threshold form, imposing the worst punishment upon violation. Target-based rules dominate instrument-based rules if and only if the central bank’s information is sufficiently precise, and they are relatively more attractive the less severe the central bank’s commitment problem. The optimal unconstrained rule relaxes the instrument threshold whenever the target threshold is satisfied.
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The Gulf Cooperation Council (GCC) intends to form a monetary union using the EMU process as a blueprint, including a set of Maastricht-style convergence criteria. Yet, as the 2010 deadline approaches, few of the necessary institu...
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The Gulf Cooperation Council (GCC) intends to form a monetary union using the EMU process as a blueprint, including a set of Maastricht-style convergence criteria. Yet, as the 2010 deadline approaches, few of the necessary institutional preparations have been made. This paper argues that while GCC leaders considered the economic case (on the whole beneficial) they neglected to fully consider the political implications of monetary union. It concludes that devolving decision-making powers to pan-GCC institutions, the need for greater levels of budgetary transparency and fiscal discipline may presently be considered too costly for the region's ruling elites.
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Central banks serve many key roles in financial markets and economies. One of their most important tasks consists of lending of last resort. When standard sources of funding dry up, banks and increasingly other financial instituti...
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Central banks serve many key roles in financial markets and economies. One of their most important tasks consists of lending of last resort. When standard sources of funding dry up, banks and increasingly other financial institutions expect central banks to replace conventional lenders. Changed realities in financial markets, however, challenge central banks to reconsider the terms traditionally applied to their emergency lending facilities. The Bagehot dictum, providing the elementary criteria for last resort lending, must be reassessed in light of today's large, interconnected financial markets in which banks pose enormous threats to financial stability and transposition of monetary policy has become more complicated for central banks. This article analyses these issues from the perspective of lending of last resort by the US Federal Reserve System (Fed'), the central banks of the Eurozone (Eurosystem') and the Bank of England. It argues in favour of robust and reliable lending criteria and consequently the elimination of the principle of constructive ambiguity and a flexible application of all other traditional lending requirements. Central banks do not operate in a legal vacuum, but the legal provisions on which such lending relies have been given little attention. The article breaks with this tradition, focusing on the Eurosystem whose legal framework leaves important issues unaddressed. It calls for an explicit mandate of financial stability for the Eurosystem that prescribes the circumstances under which financial stability takes priority over the price stability objective.
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