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One implication of the concept of monetary equilibrium is that the money supply should vary with money demand. In a recent paper, Bagus and Howden (Rev Austrian Econ 24:383-402, 2011) argue that this conclusion is predicated on th...
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One implication of the concept of monetary equilibrium is that the money supply should vary with money demand. In a recent paper, Bagus and Howden (Rev Austrian Econ 24:383-402, 2011) argue that this conclusion is predicated on the assumption of price stickiness. The purpose of this paper is to suggest that the foundation of monetary equilibrium is the role of money as a medium of exchange. As such, changes in the demand for money result in changes in both nominal and real spending that are welfare-reducing. This proposition is then used to examine whether a monetary policy in which the central bank varies the money supply in response to money demand can be considered optimal. In addition, the paper considers how a free banking system with competitive note issuance would vary the money supply in response to changes in money demand. In both cases, the results are consistent with the concept of monetary equilibrium. In addition, these results can be obtained even when prices are perfectly flexible if trade is decentralized (i.e. not conducted in Walrasian markets). Price stickiness is therefore not a necessary condition to suggest that the money supply should vary with money demand.
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There is a great deal of support for nominal income targeting in the literature on strategies for monetary policy in a closed economy framework. Is nominal income targeting equally attractive in a small open economy? This paper co...
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There is a great deal of support for nominal income targeting in the literature on strategies for monetary policy in a closed economy framework. Is nominal income targeting equally attractive in a small open economy? This paper compares nominal income targeting to alternative monetary policy rules in a stochastic macro model for a small open economy. We find that both the weighting in the overall price level of the exchange rate and foreign prices and the elasticity of output supplied with respect to the real exchange rate are important factors in assessing the attractiveness of nominal income targeting. In a small open economy where the size of both parameters is not negligible, a rule targeting the overall price level may actually be preferred to nominal income targeting.
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A good harvest usually leads to a collapse in agricultural prices and farmers' nominal income. To stabilize the market, many countries introduce a target-zone policy, together with product purchase or price subsidy strategies. Thi...
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A good harvest usually leads to a collapse in agricultural prices and farmers' nominal income. To stabilize the market, many countries introduce a target-zone policy, together with product purchase or price subsidy strategies. This paper analyzes the effect of a target zone with different strategies operated in coordination. We find that the target zone in conjunction with the government's purchasing policy can stabilize the agricultural product wholesale price and farmers' nominal income when there is a disturbance in the agricultural market. However, this is not the case if there is a target zone along with a price subsidy policy.
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The fiscal policy environment central banks operate in can be radically different with respect to debt levels, maturity structures and whether or not fiscal adjustments are spending-or tax-based. Despite this, most analyses of mon...
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The fiscal policy environment central banks operate in can be radically different with respect to debt levels, maturity structures and whether or not fiscal adjustments are spending-or tax-based. Despite this, most analyses of monetary policy delegation schemes typically ignore the behavior of the fiscal policy maker. This paper investigates whether delegating either nominal income or price level targets to a monetary authority yields social gains in an economy with government debt, where the fiscal policymaker, acting strategically, may support or undermine the policies of the central bank. We argue that the fiscal environment plays an important role in determining the performance of monetary policy. The gains to price level targeting typically found in the literature can be overturned at empirically relevant debt-to-GDP ratios, when debt stabilization is achieved through spending cuts. In contrast these gains are retained if the fiscal authorities utilize taxes to respond to shocks and stabilize debt. (C) 2017 Elsevier B.V. All rights reserved.
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This paper shows that two monetary policy strategies--hybrid nominal income targeting and strict inflation targeting--are efficient strategies of monetary policy in the sense that they are special cases of the optimal monetary pol...
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This paper shows that two monetary policy strategies--hybrid nominal income targeting and strict inflation targeting--are efficient strategies of monetary policy in the sense that they are special cases of the optimal monetary policy strategy. In thecase of a hybrid nominal income targeting strategy, the policymaker chooses a unitary trade-off between real output and the rate of inflation, while under strict inflation targeting the policymaker attaches a zero weight on output in the optimal policyrule.
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Like most central banks, the European Central Bank makes and implements its monetary policy decisions by adjusting its targets for short-term interest rates in response to information gleaned from a wide range of macroeconomic ind...
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Like most central banks, the European Central Bank makes and implements its monetary policy decisions by adjusting its targets for short-term interest rates in response to information gleaned from a wide range of macroeconomic indicators and projections. Unlike other central banks, however, the ECB also monitors money growth as a 'cross check' against the macroeconomic analysis that guides its policies of interest rate management. This paper argues that making further use of this 'second pillar' would help the ECB to better achieve its nominal objectives in the present environment of exceptionally low interest rates. By modifying the 'P-star' framework - a small-scale model with Quantity Theory foundations - the paper shows how the ECB could set a quantitative 'reference value' for Divisia money growth to stabilize nominal spending around a target path, even while its traditional interest rate policies are constrained by the zero lower bound.
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Discussions of monetary policy rules after the 2007-2009 recession highlight the potential ineffectiveness of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This pe...
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Discussions of monetary policy rules after the 2007-2009 recession highlight the potential ineffectiveness of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank's actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of the capacity to manipulate a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long-run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment. (C) 2017 Elsevier Inc. All rights reserved.
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The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role...
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The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role of monetary policy.Specifically, early evidence suggested that this increased stability is the result of monetary policy that responded much more strongly to realized inflation. Recent evidence casts doubt on this change in monetary policy. An alternative hypothesis is that the change in monetary policy was the result of a change in doctrine; specifically the rejection of the view that inflation was largely a cost-push phenomenon. As a result, this alternative hypothesis suggests that the change in monetary policy beginning in 1979 is reflected in the Federal Reserve's response to expectations of nominal income growth rather than realized inflation as previously argued. I provide evidence for this hypothesis by estimating the parameters of a monetary policy rule in whichpolicy adjusts to forecasts of nominal GDP for the pre-and post-Volcker eras. Finally, I embed the rule in two dynamic stochastic general equilibrium models with gradual price adjustment to determine whether the overhaul of doctrine can explain the reduction in the volatility of inflation and the output gap.
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We evaluate the Taylor rule and the nominal income-targeting rule at alternative horizons, along the dimension of determinacy and E-stability of the rational expectations equilibrium. We use the New Keynesian model frequently used...
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We evaluate the Taylor rule and the nominal income-targeting rule at alternative horizons, along the dimension of determinacy and E-stability of the rational expectations equilibrium. We use the New Keynesian model frequently used as a benchmark model for the evaluation of alternative monetary policy rules in the recent literature, for this purpose. Evaluating the two policy rules along this dimension, our results clearly prefer the Taylor rule over the nominal income-targeting rule.
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We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) s...
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We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the representative agent with commitment subject to the information set of the policymaker. Even with monopolistic distortions, the optimal full-information rule makes the economy mimic the hypothetical full-flexibility equilibrium. Strict versions of inflation targeting, nominal-income-growth targeting, and other such simple rules are suboptimal under both full and partial information but flexible versions are optimal under certain partial-information assumptions. Nominal-income-growth targeting dominates inflation targeting for plausible parameter values.
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